EXHIBIT 1
IIJ Announces First Quarter Results for the Fiscal Year Ending March 31, 2009
TOKYO, Aug. 12, 2008 (PRIME NEWSWIRE) -- Internet Initiative Japan Inc. (Nasdaq:IIJI) (TSE1:3774) ("IIJ"), one of Japan's leading Internet-access and comprehensive network solutions providers, today announced its first quarter financial results for the fiscal year ending March 31, 2009 ("FY2008") (footnote 1).
Highlights of First Quarter FY2008 Results
-- Revenues totaled JPY16,328 million ($153.8 million), an increase
of 19.2% from 1Q07. Connectivity grew by 24.5%, Outsourcing by
19.4% and SI by 21.4% from 1Q07 respectively.
-- Operating income was JPY411 million ($3.9 million), a decrease
of 40.5% from 1Q07. We had losses from newly established 4
consolidated subsidiaries and a deferment of human resources
related SI revenue and income.
-- Net income was JPY169 million ($1.6 million), a decrease of
70.4% from 1Q07. Decreased operating income and absence of
capital gains from the sale of equity securities which were
recorded in 1Q07 had adverse effect.
Overview of 1st Quarter FY2008 Financial Results and Business Outlook (footnote 2)
"In 1Q08, we've seen continuous demands for IT related outsourcing. Our recurring revenues from connectivity and outsourcing services, systems operation and maintenance accumulated and showed steady growth year-over-year. Systems construction was not strong as it tends to be weak in the first quarter of every fiscal year due to seasonal factor," said Koichi Suzuki, President and CEO of IIJ.
"As for the recurring revenues, they have increased by 22.5% year-over-year led by continuous needs for e-mail security and data center related outsourcing services. Also, demands for anti-DDoS service are gradually arising and system operation and maintenance followed by the completion of SI project in the previous quarters are accumulating. Further more, our new service launched in January 2008 called IIJ Mobile Service, a mobile data communication service for corporate use that is provided together with outsourcing services, is expanding. The growth is in line with our anticipation with approximately 10,000 contracts which make additional accumulation of our connectivity revenue hereafter. As for the systems construction, in a quarter where systems construction revenues are seasonally low, we had a deferment of human resources related SI revenue and income which is expected to realize with the completion of SI projects in the coming quarters. From the above and from the increase in SG&A expenses along with business expansion and loss related to newly established consolidated subsidiaries affected the decrease in operating income year-over-year."
"In the coming years, even if the Japanese economic situation worsens, network utilizations and IT related outsourcings by corporate will become indispensable. In such environment, we will make effort in maintaining our position to take in outsourcing demands with our IP related technological skills and excellent client base. Also, in addition to the growth from existing services driven by demands for network related outsourcing services, we anticipate additional growth from new business developments to contribute to revenue and income in the upcoming years."
1st Quarter FY2008 Financial Results
Results of Operations
---------------------------------------------------------------------
(JPY in
Operating Results Summary millions)
---------------------------------------------------------------------
1Q08 1Q07 YoY %
change
---------------------------------------------------------------------
Total Revenues 16,328 13,696 19.2%
---------------------------------------------------------------------
Total Costs 13,303 10,942 21.6%
---------------------------------------------------------------------
SG&A Expenses and R&D 2,614 2,062 26.8%
---------------------------------------------------------------------
Operating Income 411 692 (40.5%)
---------------------------------------------------------------------
Income before Income Tax Expense 310 757 (59.1%)
---------------------------------------------------------------------
Net Income 169 571 (70.4%)
---------------------------------------------------------------------
Revenues
Revenues in 1Q08 totaled JPY16,328 million, an increase of 19.2% from JPY13,696 million in 1Q07.
(JPY in
Revenues millions)
---------------------------------------------------------------------
1Q08 1Q07 YoY %
change
----------------------------------------------------------------------
Total Revenues: 16,328 13,696 19.2%
----------------------------------------------------------------------
Connectivity and Outsourcing
Services 8,396 6,871 22.2%
----------------------------------------------------------------------
SI 7,689 6,334 21.4%
----------------------------------------------------------------------
Equipment Sales 238 491 (51.4%)
----------------------------------------------------------------------
ATM Operation Business (footnote 3) 5 -- --
---------------------------------------------------------------------
Connectivity and Outsourcing Services revenue were JPY8,396 million in 1Q08, an increase of 22.2% compared to 1Q07 mostly led by the following; 1) Continuous increase in outsourcing services revenues especially from email and data center related services reflecting needs for outsourcing and networking from corporate and 2) the increase in connectivity service for home use (up 98.0% YoY) due to the full contribution from hi-ho, which we acquired in June 2007, of JPY1,203 million (3 months) compared to JPY339 million in 1Q07 (1 months).
SI revenues increased by 21.4% to JPY7,689 million in 1Q08 compared to 1Q07. Systems construction was not strong (up 18.9% YoY) in 1Q08 as it tends to be weak in the first quarter of every fiscal year due to a seasonal factor in corporate spending in Japan (footnote 4). Systems operation and maintenance on the contrary increased (up 23.0% YoY) with the steady accumulation from the previous quarters.
Equipment sales revenues were JPY238 million in 1Q08, a decrease of 51.4% compared to 1Q07.
ATM Operation Business revenues were JPY5 million in 1Q08. These revenues are from Trust Networks Inc. which was established to provide and operates ATM network systems placed in designated facilities. This new business is currently under planning and preparation for business launch.
Cost and expense
Cost of revenues was JPY13,303 million in 1Q08, an increase of 21.6% compared to 1Q07.
(JPY in
Cost of Revenues millions)
---------------------------------------------------------------------
1Q08 1Q07 YoY %
change
---------------------------------------------------------------------
Cost of Revenues: 13,303 10,942 21.6%
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Connectivity and Outsourcing
Services 7,065 5,670 24.6%
---------------------------------------------------------------------
SI 6,024 4,849 24.2%
---------------------------------------------------------------------
Equipment Sales 199 423 (53.1%)
---------------------------------------------------------------------
ATM Operation Business 15 -- --
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Cost of Connectivity and Outsourcing Services revenue were JPY7,065 million in 1Q08, an increase of 24.6% compared to 1Q07 mainly due to the increase in network operation and data center related costs resulting from increase in revenue growth and the cost incurred by hi-ho (3 months).
The gross margin for connectivity and outsourcing services in 1Q08 was JPY1,331 million, an increase of 10.8% compared to 1Q07. The gross margin ratio in 1Q08 was 15.9%, compared to 17.5% in 1Q07, affected by the relatively low gross margin of hi-ho and the initial costs for new business development.
Cost of SI revenues was JPY6,024 million in 1Q08, an increase of 24.2% compared to 1Q07 mainly due to the increase in outsourcing and personnel related costs resulting from increase in revenue growth.
The gross margin for SI in 1Q08 was JPY1,665 million, an increase of 12.0% compared to 1Q07. The gross margin ratio was 21.6% compared to 23.5% in 1Q07.
Cost of Equipment Sales revenues was JPY199 million in 1Q08, a decrease of 53.1% compared to 1Q07.
The gross margin ratio for equipment sales in 1Q08 was 16.4%, compared to 13.6% in 1Q07.
Cost of ATM Operation Business revenues was JPY15 million in 1Q08. Gross margin was a loss of JPY10 million.
Sales and marketing expenses were JPY1,173 million in 1Q08, an increase of 24.9% compared to 1Q07. The increase was mainly due to the increase in personnel and advertising expenses resulting from business expansion, as well as expenses related to hi-ho of 3 months.
General and administrative expenses were JPY1,383 million in 1Q08, an increase of 29.6% compared to 1Q07. The increase was mainly due to the increase in personnel related and outsourcing expenses and rent expenses resulting from business expansion. There were also expenses related to new business from On-Demand Solutions Inc., Trust Networks Inc., GDX Japan, K.K. and IIJ Innovation Institute Inc.
Research and development expenses were JPY59 million in 1Q08, an increase of 4.4% compared to 1Q07.
Operating income
Operating income was JPY411 million in 1Q08, a decrease of 40.5% compared to 1Q07 of JPY692 million. The increase in personnel related costs from business expansion and loss from new business developments of JPY166 million offset the increase in gross margin.
Other income (expenses) and others
Other income (expenses) in 1Q08 were a net other expense of JPY102 million mainly due to interest payments of JPY106 million and as there was a net loss of JPY7 million (zero gains and impairment loss of JPY7 million) from available-for-sale securities. On the contrary, 1Q07 was net other income of JPY65 million as there were net gains of JPY142 million (sales gains of JPY214 million and impairment loss of JPY72 million) from available-for-sale securities.
Income tax expense in 1Q08 was JPY213 million mainly due to deferred tax expense of JPY127 million and the increase in income tax expenses. 1Q07 was an expense of JPY175 million.
Minority interests in losses of subsidiaries in 1Q08 were JPY55 million related to GDX Japan Inc. and Trust Networks Inc., compared to minority interests in losses of subsidiaries of JPY9 million in 1Q07.
Equity in net income of equity method investees in 1Q08 was JPY18 million, compared to equity in net loss of equity method investees of JPY20 million in 1Q07.
Net income was JPY169 million in 1Q08, a decrease of 70.4% compared to 1Q07.
Financial Condition
Balance Sheets
As of June 30, 2008, total assets decreased by JPY3,768 million from the prior year end to JPY51,934 million.
For current assets, prepaid expenses increased by JPY931 million, mainly for bonus payments to our employees and maintenance expenses related to SI projects; account receivables decreased by JPY3,346 million, each from the respective amount as of March 31, 2008. The fair value of available-for-sale securities as of June 30, 2008 increased by JPY90 million to JPY934 million compared to March 31, 2008. For current liabilities, short-term borrowings decreased by JPY1,650 million due to repayments; and accounts payable decreased by JPY1,965 million, each from the respective amount as of March 31, 2008.
Total shareholders' equity as of June 30, 2008 was JPY24,991 million and shareholder's equity ratio (shareholder's equity/total assets) as of June 30, 2008 was 48.1%.
Cash Flows
Cash and cash equivalents as of June 30, 2008 decreased by JPY1,528 million to JPY9,943 million, compared to JPY11,471 million as of March 31, 2008.
Net cash provided by operating activities in 1Q08 was JPY2,018 million, compared to net cash used in operating activities of JPY1,328 million in 1Q07. There were operating income, a decrease in accounts receivable of JPY3,328 million, an increase in inventories, prepaid expenses and other current and non current assets of JPY832 million, a decrease in accounts payable of JPY1,811 million mainly related to SI projects and a payment of JPY512 million for income taxes.
Net cash used in investing activities in 1Q08 was JPY825 million, compared to net cash used in investing activities of JPY3,520 million in 1Q07, mainly due to payment of JPY768 million for the purchase of property and equipment.
Net cash used in financing activities in 1Q08 was JPY2,695 million, compared to net cash provided by financing activities of JPY3,898 million in 1Q07, mainly due to repayments of short-term borrowing with initial maturities over three months of JPY250 million (net), principal payments under capital leases of JPY839 million and a net decrease of JPY1,400 million in short-term borrowings with initial maturities less than three months.
1st Quarter FY2008 Business Review
Analysis by Service
Connectivity and Outsourcing Services
Connectivity services revenues for corporate use increased by 4.6% compared to 1Q07 as the contracted bandwidth from IP Service increased together with the steady increase in contracts of broadband services. As for IIJ Mobile service which was launched in January 2008 was in line with our anticipation with approximately 10,000 contracts. The total contracted bandwidth increased by 91.8Gpbs to 422.1Gbps compared to 1Q07.
For connectivity services for home use, there was a full quarterly contribution to revenues from hi-ho of JPY1,203 million (3 months) compared to JPY339 million (1 months).
Outsourcing services revenues increased by 19.4% compared to 1Q07 as strong demands from email related services, data center services and internet-VPN had continued.
Number of Contracts for Connectivity Services
---------------------------------------------------------------------
1Q08 1Q07 YoY
Change
---------------------------------------------------------------------
Connectivity Services (Corporate Use) 32,939 21,210 11,729
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IP Service (-99Mbps) 854 773 81
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IP Service (100Mbps-999Mbps) 203 168 35
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IP Service (1Gbps-) 72 58 14
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IIJ Data Center Connectivity Service 286 278 8
---------------------------------------------------------------------
IIJ FiberAccess/F and IIJ DSL/F 24,466 18,252 6,214
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Others 7,058 1,681 5,377
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Connectivity Services (Home Use) 467,453 555,946 (88,493)
---------------------------------------------------------------------
Under IIJ Brand 49,279 54,192 (4,913)
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hi-ho 188,575 186,677 1,898
---------------------------------------------------------------------
OEM (footnote 5) 229,599 315,077 (85,478)
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Total Contracted Bandwidth 422.1Gbps 330.3Gbps 91.8Gbps
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Connectivity and Outsourcing Services Revenues Breakdown and Cost
(JPY in
millions)
---------------------------------------------------------------------
1Q08 1Q07 YoY %
Change
---------------------------------------------------------------------
Connectivity Service (Corporate Use) 3,110 2,973 4.6%
---------------------------------------------------------------------
IP Service (footnote 6) 2,270 2,218 2.4%
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IIJ FiberAccess/F and IIJ DSL/F 713 615 15.8%
---------------------------------------------------------------------
Others 127 140 (9.2%)
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Connectivity Service (Home Use) 1,596 806 98.0%
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Under IIJ Brand 257 282 (8.8%)
---------------------------------------------------------------------
hi-ho 1,203 339 254.7%
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OEM 136 185 (26.5%)
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Outsourcing Services 3,690 3,092 19.4%
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Total Connectivity and
Outsourcing Services 8,396 6,871 22.2%
---------------------------------------------------------------------
Cost of Connectivity and
Outsourcing Services 7,065 5,670 24.6%
---------------------------------------------------------------------
Backbone Cost (included in the
cost of Connectivity and
Outsourcing Service) 895 819 9.3%
---------------------------------------------------------------------
Connectivity and Outsourcing Services
Gross Margin Ratio 15.9% 17.5% --
---------------------------------------------------------------------
SI
One-time revenues from systems construction in 1Q08 increased by 18.9% compared to 1Q07 and recurring revenues from systems operation and maintenance increased by 23.0% compared to 1Q07.
The order backlog for SI and equipment sales as of June 30, 2008 was JPY16,836 million, a decrease of 2.0% from the amount as of June 30, 2007. In 1Q07, we received order of a large-scaled SI project of JPY1,833 million which completed in 3Q07. The order backlog for systems construction including equipment sales decreased by 34.2% to JPY5,081 million and the order back log for systems operation and maintenance increased by 24.3% to JPY11,755 million compared to the end of 1Q07 respectively.
(JPY in
SI Revenue Breakdown and Cost millions)
---------------------------------------------------------------------
1Q08 1Q07 YoY %
Change
---------------------------------------------------------------------
SI Revenues (footnote 7) 7,689 6,334 21.4%
---------------------------------------------------------------------
Systems Construction 3,036 2,552 18.9%
---------------------------------------------------------------------
Systems Operation and Maintenance 4,653 3,782 23.0%
---------------------------------------------------------------------
Cost of SI 6,024 4,849 24.2%
---------------------------------------------------------------------
SI Gross Margin Ratio 21.6% 23.5% --
---------------------------------------------------------------------
SI and Equipment Sales Order Backlog 16,836 17,174 (2.0%)
---------------------------------------------------------------------
Equipment Sales
(JPY in
Equipment Sales Revenue and Cost millions)
---------------------------------------------------------------------
1Q08 1Q07 YoY %
Change
---------------------------------------------------------------------
Equipment Sales Revenues 238 491 (51.4%)
---------------------------------------------------------------------
Cost of Equipment Sales 199 423 (53.1%)
---------------------------------------------------------------------
Equipment Sales Gross Margin Ratio 16.4% 13.6% --
---------------------------------------------------------------------
ATM Operation Business
(JPY in
ATM Operation Business Revenue and Cost millions)
---------------------------------------------------------------------
1Q08 1Q07 YoY %
Change
---------------------------------------------------------------------
ATM Operation Business Revenues 5 -- --
---------------------------------------------------------------------
Cost of ATM Operation Business 15 -- --
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Other Financial Statistics
(JPY in
Other Financial Statistics millions)
---------------------------------------------------------------------
1Q08 1Q07 YoY %
Change
---------------------------------------------------------------------
Adjusted EBITDA 1,656 1,740 (4.8%)
---------------------------------------------------------------------
CAPEX, including capital leases 1,831 2,232 (18.0%)
---------------------------------------------------------------------
Depreciation and amortization 1,245 1,048 18.8%
---------------------------------------------------------------------
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:
(JPY in
Adjusted EBITDA millions)
---------------------------------------------------------------------
1Q08 1Q07
---------------------------------------------------------------------
Adjusted EBITDA 1,656 1,740
---------------------------------------------------------------------
Depreciation and Amortization 1,245 1,048
---------------------------------------------------------------------
Operating Income 411 692
---------------------------------------------------------------------
Other Income (Expense) (102) 65
---------------------------------------------------------------------
Income Tax Expense 213 175
---------------------------------------------------------------------
Minority Interests in Losses of Subsidiaries 55 9
---------------------------------------------------------------------
Equity in Net Income (Loss) of Equity
Method Investees 18 (20)
---------------------------------------------------------------------
Net Income 169 571
---------------------------------------------------------------------
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:
(JPY in
CAPEX millions)
---------------------------------------------------------------------
1Q08 1Q07
---------------------------------------------------------------------
CAPEX, including capital leases 1,831 2,232
---------------------------------------------------------------------
Acquisition of Assets by Entering into
Capital Leases 1,063 1,662
---------------------------------------------------------------------
Purchase of Property and Equipment 768 570
---------------------------------------------------------------------
Target
---------------------------------------------------------------------
We maintain our initial targets for FY2008 announced on May 15, 2008
(JPY in
millions)
---------------------------------------------------------------------
Income before
Income Tax
Revenues Operating Expense Net
Income (Benefit) Income
---------------------------------------------------------------------
Full FY2008 78,500 5,200 4,700 5,200
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Presentation
Presentation Materials will be posted on our web site (http://www.iij.ad.jp/en/IR/) on August 12, 2008.
About Internet Initiative Japan Inc.
Founded in 1992, Internet Initiative Japan Inc. (IIJ) (Nasdaq:IIJI) TSE1:3774) 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
For inquiries, contact: YUKO KAZAMA IIJ Investor Relations Office Tel: +81-3-5259-6500 E-mail: ir@iij.ad.jp URL: http://www.iij.ad.jp/
Statements made in this press release regarding IIJ's or management's intentions, beliefs, expectations, or predictions for the future are forward-looking statements that are based on IIJ's and managements' current expectations, assumptions, estimates and projections about its business and the industry. These forward-looking statements, such as statements regarding FY2008 revenues and operating and net profitability, are subject to various risks, uncertainties and other factors that could cause IIJ's actual results to differ materially from those contained in any forward-looking statement. These risks, uncertainties and other factors include: IIJ's ability to maintain and increase revenues from higher-margin services such as systems integration and outsourcing services; the possibility that revenues from connectivity services may decline substantially as a result of competition and other factors; the ability to compete in a rapidly evolving and competitive marketplace; the impact on IIJ's profits of fluctuations in costs such as backbone costs and subcontractor costs; the impact on IIJ's profits of fluctuations in the price of available-for-sale securities; the impact of technological changes in its industry; IIJ's ability to raise additional capital to cover its indebtedness; the possibility that NTT, IIJ's largest shareholder, may decide to exercise substantial influence over IIJ; and other risks referred to from time to time in IIJ's filings on Form 20-F of its annual report and other filings with the United States Securities and Exchange Commission.
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. The translations
of Japanese yen into U.S. dollars are solely for the convenience
of readers outside of Japan. The rate used for the translation was
JPY106.17 per US$1.00, which was the noon buying rate on June 30,
2008.
2) From 1Q08, "Value-added Service ("VAS")" and "Other" of
"Connectivity and VAS revenues" have been renamed to
"Outsourcing Services". Related to this change, "Connectivity
and VAS revenues" has been renamed to "Connectivity and
Outsourcing Services revenues".
3) From 1Q08, we have disclosed revenues and costs related to ATM
Operation Business. ATM Operation Business revenue consists of
commission received for each withdrawal transaction from a bank
account and ATM operation service. The commission for each
withdrawal are billed and recognized monthly. ATM operation
service lends ATM machines for a contract term of one year and
receives monthly fees. This service is billed and recognized
monthly on a straight-line basis. Initial set up fees received
in connection with ATMs operation service are deferred and
recognized over the contract period.
4) Corporate spending in Japan has the tendency to become the
largest in the fourth quarter and the lowest in the first quarter
as many Japanese companies have fiscal years ending in March 31.
5) OEM services provided to other service providers.
6) IP Service revenues include revenues from the Data Center
Connectivity Service.
7) From 1Q08, we have disclosed Systems integration revenue
breakdown in our consolidated statements of income.
Appendix 1
Internet Initiative Japan Inc.
------------------------------
Quarterly Consolidated Balance Sheets (Unaudited)
-------------------------------------------------
(As of June 30, 2008 and March 31, 2008)
------------------------------------------------------------------
As of
As of June 30, 2008 March 31, 2008
------------------------------------------------------------------
Thousands
of U.S. Thousands Thousands
Dollars of JPY % of JPY %
------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents 93,654 9,943,205 11,470,980
Short-term
investments -- -- 12,181
Accounts
receivable, net of
allowance for
doubtful accounts of
JPY 18,591 thousand
and JPY 24,677
thousand at June 30,
2008 and March 31,
2008,
respectively 83,917 8,909,504 12,255,163
Inventories 11,164 1,185,250 1,184,160
Prepaid expenses 27,659 2,936,607 2,005,274
Other current assets,
net of allowance for
doubtful accounts of
JPY 11,220 thousand
and JPY 7,470
thousand at June 30,
2008 and March 31,
2008, respectively 13,923 1,478,237 1,557,869
------------------------------------------ ------------
Total current
assets 230,317 24,452,803 47.1 28,485,627 51.1
INVESTMENTS IN AND
ADVANCES TO EQUITY
METHOD INVESTEES, net
of loan loss valuation
allowance of JPY 16,701
thousand at June 30,
2008 and March 31, 2008 9,162 972,744 1.9 991,237 1.8
OTHER INVESTMENTS 23,060 2,448,326 4.7 2,363,770 4.2
PROPERTY AND
EQUIPMENT, net of
accumulated
depreciation and
amortization of JPY
14,316,358 thousand
and JPY 14,029,785
thousand at June 30,
2008 and March 31,
2008 113,148 12,012,871 23.1 11,740,210 21.1
GOODWILL 23,616 2,507,258 4.8 2,507,258 4.5
OTHER INTANGIBLE ASSETS
--Net 31,843 3,380,745 6.5 3,400,117 6.1
GUARANTEE DEPOSITS 19,599 2,080,875 4.0 2,037,165 3.7
OTHER ASSETS, net of
allowance for doubtful
accounts of JPY 67,251
thousand, JPY 64,796
thousand at June 30,
2008 and March 31,
2008, respectively 38,415 4,078,542 7.9 4,177,162 7.5
------------------------------------------ ------------
TOTAL 489,160 51,934,164 100.0 55,702,546 100.0
------------------------------------------ ------------
----------------------------------------------------------------
-------------------------------------------------------------------
As of
As of June 30, 2008 March 31, 2008
-------------------------------------------------------------------
Thousands
of U.S. Thousands Thousands
Dollars of JPY % of JPY %
-------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
CURRENT
LIABILITIES:
Short-term
borrowings 70,641 7,500,000 9,150,000
Capital lease
obligations --
current portion 31,950 3,392,140 3,455,948
Accounts payable 55,853 5,929,863 7,895,238
Accrued expenses 9,580 1,017,076 994,138
Accrued retirement
and pension costs
--current 108 11,436 11,436
Deferred income 14,663 1,556,795 1,552,896
Other current
liabilities 5,626 597,366 864,366
--------------------- -----------
Total current
liabilities 188,421 20,004,676 38.5 23,924,022 42.9
CAPITAL LEASE
OBLIGATIONS --
Noncurrent 45,783 4,860,731 9.4 4,738,359 8.5
ACCRUED RETIREMENT
AND PENSION COSTS
--Noncurrent 11,060 1,174,207 2.3 1,101,951 2.0
OTHER NONCURRENT
LIABILITIES 6,255 664,196 1.2 663,399 1.2
--------------------- -----------
Total Liabilities 251,519 26,703,810 51.4 30,427,731 54.6
--------------------- -----------
MINORITY INTEREST 2,252 239,075 0.5 294,102 0.6
COMMITMENTS AND
CONTINGENCIES
SHAREHOLDERS'
EQUITY:
Common-stock--
authorized,
377,600 shares;
issued and
outstanding,
206,478 shares at
June 30, 2008 and
at March 31, 2008 158,556 16,833,847 32.4 16,833,847 30.2
Additional paid-in
capital 260,071 27,611,737 53.2 27,611,737 49.6
Accumulated
deficit (184,543) (19,592,890) (37.7) (19,555,489) (35.1)
Accumulated other
comprehensive
income 1,305 138,585 0.2 90,618 0.1
--------------------- -----------
Total shareholders'
equity 235,389 24,991,279 48.1 24,980,713 44.8
--------------------- -----------
TOTAL 489,160 51,934,164 100.0 55,702,546 100.0
--------------------- -----------
-------------------------------------------------------------------
(Note) The U.S. dollar amounts represent translations of yen
amounts at the rate of JPY 106.17 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 June 30, 2008.
Appendix 2
Internet Initiative Japan Inc.
------------------------------
Quarterly Consolidated Statements of Income (Unaudited)
-------------------------------------------------------
(For the three months ended June 30, 2008 and June 30, 2007)
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Three Months Ended Three Months Ended
June 30, 2008 June 30, 2007
------------------------------------------------
Thousands % of %
of U.S. Thousands total Thousands of total
Dollars of JPY revenues of JPY revenues
-------------------------------------------------------------------
REVENUES:
Connectivity and
outsourcing
services:
Connectivity
(corporate use) 29,290 3,109,754 2,972,772
Connectivity
(home use) 15,035 1,596,203 806,326
Outsourcing
services 34,760 3,690,496 3,091,978
--------------------- ----------
Total 79,085 8,396,453 6,871,076
Systems
integration:
Systems
Construction 28,593 3,035,748 2,552,602
Systems
Operation and
Maintenance 43,827 4,653,076 3,781,862
--------------------- ----------
Total 72,420 7,688,824 6,334,464
Equipment sales 2,242 238,021 490,211
ATM operation
business 45 4,835 --
--------------------- ----------
Total revenues 153,792 16,328,133 100.0 13,695,751 100.0
--------------------- ----------
COST AND EXPENSES:
Cost of
connectivity and
outsourcing
services 66,545 7,065,072 5,669,522
Cost of systems
integration 56,741 6,024,237 4,848,884
Cost of equipment
sales 1,874 198,926 423,783
Cost of ATM
operation
business 138 14,681 --
--------------------- ----------
Total cost 125,298 13,302,916 81.5 10,942,189 79.9
Sales and marketing 11,046 1,172,726 7.2 939,130 6.9
General and
administrative 13,024 1,382,708 8.5 1,066,843 7.8
Research and
development 550 58,521 0.3 56,051 0.4
--------------------- ----------
Total cost and
expenses 149,918 15,916,871 97.5 13,004,213 95.0
--------------------- ----------
OPERATING INCOME 3,874 411,262 2.5 691,538 5.0
--------------------- ----------
OTHER INCOME
(EXPENSE):
Interest income 75 7,956 11,212
Interest expense (1,000) (106,203) (96,908)
Foreign exchange
losses (23) (2,403) (926)
Net gains on
sales of other
investments -- -- 213,530
Losses on write-
down of other
investments (70) (7,391) (71,929)
Other--net 60 6,350 10,233
--------------------- ----------
Other
income--net (958) (101,691) (0.6) 65,212 0.5
--------------------- ----------
INCOME FROM
OPERATIONS BEFORE
INCOME TAX
EXPENSE,
MINORITY
INTERESTS AND
EQUITY IN NET
INCOME (LOSS)
OF EQUITY METHOD
INVESTEES 2,916 309,571 1.9 756,750 5.5
--------------------- ----------
INCOME TAX EXPENSE 2,008 213,215 1.3 175,366 1.3
MINORITY INTERESTS
IN LOSSES OF
SUBSIDIARIES 518 55,027 0.3 9,224 0.1
EQUITY IN NET
INCOME (LOSS) OF
EQUITY METHOD
INVESTEES 167 17,694 0.1 (19,852) (0.1)
--------------------- ----------
NET INCOME 1,593 169,077 1.0 570,756 4.2
--------------------- ----------
--------------------------------------------------------------------
-------------------------------------------------------------------
Three Months Three Months
Ended Ended
June 30, 2008 June 30, 2007
-------------------------------------------------------------------
NET INCOME PER SHARE
BASIC WEIGHTED-AVERAGE NUMBER OF
SHARES (shares) 206,478 205,521
DILUTED WEIGHTED-AVERAGE NUMBER
OF SHARES (shares) 206,598 205,850
BASIC WEIGHTED-AVERAGE NUMBER OF
ADS EQUIVALENTS (ADSs) 82,591,200 82,208,255
DILUTED WEIGHTED-AVERAGE NUMBER
OF ADS EQUIVALENTS (ADSs) 82,639,332 82,340,017
BASIC NET INCOME PER SHARE
(U.S. Dollars / JPY / JPY) 7.71 819 2,777
DILUTED NET INCOME PER SHARE
(U.S. Dollars / JPY / JPY) 7.70 818 2,773
BASIC NET INCOME PER ADS
EQUIVALENT (U.S. Dollars / JPY /
JPY) 0.02 2.05 6.94
DILUTED NET INCOME PER ADS
EQUIVALENT (U.S. Dollars / JPY /
JPY) 0.02 2.05 6.93
-------------------------------------------------------------------
(Note 1) The U.S. dollar amounts represent translations of yen
amounts at the rate of JPY 106.17 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 June 30, 2008.
(Note 2) The above presentation for the quarter ended June 30, 2007
has been changed to conform to the current quarter (the
quarter ended June 30, 2008) presentation.
Appendix 3
Internet Initiative Japan Inc.
------------------------------
Quarterly Consolidated Statements of Cash Flows (Unaudited)
-----------------------------------------------------------
(For the three months ended June 30, 2008 and June 30, 2007)
-------------------------------------------------------------------
Three
Months
Ended
Three Months Ended June 30,
June 30, 2008 2007
-----------------------------------
Thousands
of U.S. Thousands Thousands
Dollars of JPY of JPY
-------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income 1,592 169,077 570,756
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities:
Depreciation and amortization 11,726 1,244,913 1,047,580
Provision for retirement and
pension costs, less payments 681 72,256 47,414
Provision for (reversal of)
allowance for doubtful
accounts and advances 7 692 (4,183)
Loss on disposal of property
and equipment 280 29,688 6,628
Net gains on sales of other
investments -net -- -- (213,530)
Losses on write-down of
other investments 70 7,391 71,929
Foreign exchange losses 65 6,921 2,686
Equity in net loss of equity
method investees (net of
dividend) 119 12,686 19,852
Minority interests in losses
of subsidiaries (518) (55,027) (9,224)
Deferred income tax expense 1,193 126,712 144,247
Others -- -- (366)
Changes in operating assets
and liabilities net of
effects from acquisition of
business and a company
Decrease in accounts
receivable 31,349 3,328,373 1,739,821
Increase in inventories,
prepaid expenses and other
current and noncurrent
assets (7,841) (832,472) (2,557,479)
Decrease in accounts payable (17,060) (1,811,304) (2,307,593)
Decrease in income taxes
payable (3,127) (331,972) (680,133)
Increase in accrued expenses,
other current and noncurrent
liabilities 470 49,900 793,997
-------------------------------------------------------------------
Net cash provided by (used
in) operating activities 19,006 2,017,834 (1,327,598)
-------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and
equipment (7,234) (768,077) (569,590)
Purchase of available-for-sale
securities -- -- (287,609)
Purchase of short-term and
other investments -- -- (31,670)
Proceeds from sale of short-
term and other investments 50 5,281 --
Purchase of subsidiary stock
from minority shareholders (1,975,123)
Proceeds from sales of
available-for-sale securities -- -- 538,112
Proceeds from sales and
redemption of other
investments -- -- 3,310
Acquisition of a newly
controlled company, net of
cash acquired -- -- (912,450)
Payments of guarantee deposits (611) (64,863) (266,766)
Refund of guarantee deposits 150 15,917 --
Payments for refundable
insurance policies (122) (12,938) (11,082)
Other (1) (52) (6,690)
-------------------------------------------------------------------
Net cash used in investing
activities (7,768) (824,732) (3,519,558)
-------------------------------------------------------------------
-------------------------------------------------------------------
Three
Months
Ended
Three Months Ended June 30,
June 30, 2008 2007
------------------------------------
Thousands
of U.S. Thousands Thousands
Dollars of JPY of JPY
-------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of
short-term borrowings with
initial maturities over three
months 48,036 5,100,000 10,300,000
Repayments of short-term
borrowings with initial
maturities over three months
and long-term borrowings (50,391) (5,350,000) (4,571,000)
Principal payments under
capital leases (7,902) (838,935) (774,817)
Net decrease in short-term
borrowings with initial
maturities less than three
months (13,186) (1,400,000) (750,000)
Payment of dividends (1,945) (206,478) (306,450)
-------------------------------------------------------------------
Net cash provided by (used
in) financing activities (25,388) (2,695,413) 3,897,733
-------------------------------------------------------------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS (239) (25,464) (7,173)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (14,389) (1,527,775) (956,596)
CASH AND CASH EQUIVALENTS,
BEGINNING OF THE PERIOD 108,043 11,470,980 13,554,544
-------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF THE PERIOD 93,654 9,943,205 12,597,948
-------------------------------------------------------------------
-------------------------------------------------------------------
ADDITIONAL CASH FLOW
INFORMATION:
Interest paid 988 104,913 95,500
Income taxes paid 4,822 511,927 725,557
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of assets by
entering into capital leases 10,014 1,063,149 1,662,475
Purchase of minority interests
of consolidated subsidiaries
through share exchanges -- -- 1,012,520
Acquisition of business and a
company:
Assets acquired -- -- 1,570,720
Cash paid -- -- (1,230,450)
Liabilities assumed -- -- 340,270
-------------------------------------------------------------------
(Note 1) The U.S. dollar amounts represent translations of yen
amounts at the rate of JPY 106.17 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 June 30, 2008.
(Note 2) The above presentation for the quarter ended June 30, 2007
has been changed to conform to the current quarter (the
quarter ended June 30, 2008) presentation.
CONTACT: Internet Initiative Japan Inc.
+81-3-5259-6500
ir@iij.ad.jp
http://www.iij.ad.jp/
Note: The following information is provided to disclose IIJ's financial results (unaudited) for the three months ended June 30, 2008 in the form defined by the Tokyo Stock Exchange.
Consolidated Financial Results for the Three Months Ended June 30, 2008 (“1Q08”)
[Under accounting principles generally accepted in the United States ("U.S. GAAP")]
August 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
Filing of quarterly report (Shihanki-hokokusho) to the regulatory organization in Japan: August 14, 2008 (Scheduled)
(Amounts of less than JPY one million are rounded)
1. Consolidated Financial Results for the Three Months Ended June 30, 2008
(April 1, 2008 to June 30, 2008)
| (1) Consolidated Results of Operations | (% shown is YoY change) |
| Total Revenues | Operating Income | Income before Income Tax Expense (Benefit) | Net Income | |||||
| JPY millions | ％ | JPY millions | ％ | JPY millions | ％ | JPY millions | ％ | |
| Three months ended June 30, 2008 | 16,328 | - | 411 | - | 310 | - | 169 | - |
| Three months ended June 30, 2007 | 13,696 | 10.1 | 692 | 23.7 | 757 | (24.3) | 571 | (22.2) |
| Basic Net Income per Share | Diluted Net Income per Share | ||||
| JPY | JPY | ||||
| Three months ended June 30, 2008 | 818.86 | 818.39 | |||
| Three months ended June 30, 2007 | 2,777.12 | 2,772.68 |
| (Note) | In this document, income before income tax expense (benefit) represents income from operations before income tax expense (benefit), minority interests and equity in net loss of equity method investees in IIJ's consolidated financial statements for the three months ended June 30, 2008. |
(2) Consolidated Financial Position
| Total Assets | Shareholders' Equity | Shareholders' Equity as a percentage of Total Assets | Shareholders' Equity per share | |
| JPY millions | JPY millions | % | JPY | |
| Three months ended June 30, 2008 | 51,934 | 24,991 | 48.1 | 121,036.03 |
| Fiscal Year Ended March 31, 2008 | 55,703 | 24,981 | 44.8 | 120,985.87 |
| (Note) | Shareholders’ equity, shareholders’ equity as a percentage of total assets and shareholders’ equity per share are calculated and presented in accordance with U.S. GAAP. |
2. Dividends
| Dividend per Share | |||||
| End of the first quarter | End of the second quarter | End of the third quarter | Year-end | Total | |
| Yen | Yen | Yen | Yen | Yen | |
| Fiscal Year Ended March 31, 2008 | - | 750.00 | - | 1,000.00 | 1,750.00 |
| Fiscal Year Ending March 31, 2009 | - | 2,000.00 | |||
Fiscal Year Ending March 31, 2009 (Target) | 1,000.00 | - | 1,000.00 | ||
| (Note) | Scheduled revision to dividends during the three months ended June 30, 2008: None |
3. Target of Consolidated Financial Results for the Fiscal Year Ending March 31, 2009
| (April 1, 2008 through March 31, 2009) | (% shown is YoY change) |
| Total Revenues | Operating Income | Income before Income Tax Expense (Benefit) | Net Income | Basic Net Income per share | ||||||||
| JPY millions | % | JPY millions | % | JPY millions | % | JPY millions | % | JPY | ||||
Interim Period Ending September 30, 2009 | 34,500 | 15.0 | 1,850 | 1.9 | 1,650 | (2.8) | 800 | (77.0) | 3,875.50 | |||
Fiscal year ending March 31, 2009 | 78,500 | 17.5 | 5,200 | 9.3 | 4,700 | 7.8 | 5,200 | 0.5 | 25,184.28 | |||
| (Note) | Changes in target of interim and year-end consolidated financial results for the fiscal year ending March 31, 2008: None |
4. Others
| (1) Change of Condition in Consolidated Subsidiaries during the Three Months Ended June 30, 2008 |
| (Change of Condition in Specific Consolidated Subsidiaries with a Change of Scope of Consolidation): None |
(2) Applicaton of Simplified Accounting Method or Specific Accounting Principles for the preparation of Shihanki-hokokusho : None |
| (3) Changes in Significant Accounting and Reporting Policies for Consolidated Financial Statements |
| 1) Changes caused by revision of accounting standards: Yes |
| 2) Others: Yes |
(note)From 1Q08, “Value-added Service Revenues (“VAS”)” and “Other Revenues” of “Connectivity and VAS revenues” have been renamed to “Outsourcing Services”. Related to this change, “Connectivity and VAS revenues” has been renamed to “Connectivity and Outsourcing Services revenues”. |
| (4) Number of Shares Outstanding (Shares of Common Stock) |
| 1) The number of shares outstanding: |
For the Three Months Ended June 30, 2008 206,478 shares
For the Fiscal Year Ended March 31, 2008 206,478 shares
| 2) The number of treasury stock: |
For the Three Months Ended June 30, 2008 0 shares
For the Fiscal Year Ended March 31, 2008 0 shares
| 3) The weighted average number of shares outstanding: |
For the Three Months Ended June 30, 2008 206,478 shares
For the Fiscal Year Ended March 31, 2008 206,240 shares
[Qualitative Information and Financial Statements]
1. Analysis of Consolidated Results of Operations
(1) Overview of Consolidated Results for the Three Months Ended June 30, 2008 (“1Q08”)
In 1Q08, corporate earnings decreased, capital expenditures almost flattened and the recovery of the Japanese economy is at a halt with weakness seen in some parts of the economy. As for the near future, we must pay attention to the increasing risk of slow down in the Japanese economy, adversely affected by the slow down in the U.S. economy caused by the subprime mortgage crisis, the fluctuation in stock and foreign exchanges and the trend in crude oil prices.
In the data telecommunications market where IIJ Group (“the Group”) belongs to, we believe demands for network and outsourcing services will steadily continue, as it is indispensable for corporate to utilize information technology, thus we need to pay attention to corporate spending on capital expenditure, outsourcing and others.
In such market environment, the Group continued to provide connectivity and outsourcing services, system integrations as total network solution to large and medium-sized corporate users and governmental organizations. The Group also continued to actively engage in new business developments from newly established consolidated subsidiaries for mid- and long- term growth.
In 1Q08, monthly recurring revenues increased by 22.5% to JPY13,050 million compared to 1Q07 led by the continuous increase in outsourcing services related to email system and data centers and systems operation and maintenance, together with full contribution from hi-ho Inc., which we acquired in June 2007 (revenue of 3 months in 1Q08 compared to 1 months in 1Q07). Our new service called IIJ Mobile service had approximately 10,000 contracts in 1Q08, and are anticipated to increase in the coming quarters. As for the systems construction, although it had increased by 18.9% in 1Q08 year-over-year, revenues from systems construction in 1Q are the lowest in the fiscal year due to seasonality and there were increase in work in process related to personnel cost of SI which affected the gross margin for SI.
As a result, revenues in 1Q08 was JPY16,328 million, an increase of 19.2% compared to 1Q07. Operating income decreased by 40.5% to JPY411 million. There were increases in SG&A expenses along with business expansion and the loss related to newly established consolidated subsidiaries (On-Demand Solutions Inc., Trust Networks Inc., GDX Japan Inc. and IIJ Innovation Institute Inc.) of JPY166 million while revenue growth from SI were not so strong. Income before Income Tax Benefit was JPY310 million, a decrease of 59.1% compared to 1Q07 reflecting the absence of net gains from the sale of available-for-sale securities. Net income was JPY169 million in 1Q08, a decrease of 70.4% compared to 1Q07.
(2) Analysis of Results of Operations
From the three months ended June 30, 2008 (“1Q08”), “Value-added service (“VAS”)” and “Other” of “Connectivity and VAS revenues” have been renamed to “Outsourcing services”. Related to this change, “Connectivity and VAS revenues” has been renamed to “Connectivity and Outsourcing Services revenues”. We have disclosed revenues and costs for ATM Operation Business from 1Q08.
a) Revenues
Revenues for the three months ended June 30, 2008 were JPY16,328 million, an increase of 19.2% YoY.
| Three Months Ended June 30, 2007 | Three Months Ended June 30, 2008 | YoY % Change | |
| JPY millions | JPY millions | % | |
| Connectivity and Outsourcing Services | 6,871 | 8,396 | 22.2 |
| SI | 6,334 | 7,689 | 21.4 |
| Equipment sales | 491 | 238 | (51.4) |
| ATMs Operation Business | — | 5 | — |
| Total revenues | 13,696 | 16,328 | 19.2% |
Revenues from connectivity and outsourcing services were JPY8,396 million, an increase of 22.2% compared to 1Q07 mostly led by the followings; 1) Continuous increase in outsourcing services revenues especially from email and data center related services reflecting needs for outsourcing and networking from corporate and 2) the increase in connectivity service for home use (up 98.0% YoY) due to the full contribution from hi-ho, which we acquired in June 2007, of JPY1,203 million (3 months) compared to JPY339 million in 1Q07 (1 months).
SI revenues were JPY7,689 million, an increase of 21.4% compared to 1Q07. Systems construction was not strong (up 18.9% YoY) in 1Q08 as it tends to be weak in the first quarter of every fiscal year due to a seasonal factor in corporate spending in Japan . Systems operation and maintenance on the contrary increased (up 23.0% YoY) with the steady accumulation from the previous quarters.
Equipment sales revenues were JPY238 million, a decrease of 51.4% YoY.
ATM Operation Business Revenues were JPY5 million in 1Q08. These revenues are from Trust Networks Inc. which was established to provide and operates ATM network systems placed in designated facilities. This new business is currently under planning and preparation for business launch.
2) Cost of Revenues
Cost of revenues was JPY13,303 million, an increase of 21.6% YoY.
| Three Months Ended June 30, 2007 | Three Months Ended June 30, 2008 | YoY % Change | |
| JPY millions | JPY millions | % | |
| Connectivity and Outsourcing Services | 5,670 | 7,065 | 24.6 |
| SI | 4,849 | 6,024 | 24.2 |
| Equipment sales | 424 | 199 | (53.1) |
| ATMs Operation Business | — | 15 | — |
| Total cost of revenues | 10,942 | 13,303 | 21.6% |
The cost of connectivity and outsourcing services revenues was JPY7,065 million in 1Q08, an increase of 24.6% compared to 1Q07 mainly due to the increase in network operation related, data center related and personnel related costs resulting from increase in revenue growth and the cost incurred by hi-ho (3 months).
The cost of SI revenues was JPY6,024 million in 1Q08, an increase of 24.2% compared to 1Q07 mainly due to the increase in outsourcing and personnel related costs resulting from increase in revenue growth.
The cost of equipment sales revenues was JPY199 million in 1Q08, a decrease of 53.1% compared to 1Q07 as equipment sales revenues decreased.
The cost of ATM operation business revenues was JPY15 million.
3) Sales and Marketing Expenses, General and Administrative Expenses and Research and Development
Sales and marketing expenses were JPY1,173 million in 1Q08, an increase of 24.9% compared to 1Q07. The increase was mainly due to the increase in personnel and advertising expenses resulting from business expansion, as well as expenses related to hi-ho of 3 months.
General and administrative expenses were JPY1,383 million in 1Q08, an increase of 29.6% compared to 1Q07. The increase was mainly due to the increase in personnel related expense and outsourcing expenses and rent expenses resulting from business expansion. There were also expenses related to the newly established consolidated subsidiaries.
Research and development expenses were JPY59 million in 1Q08, an increase of 4.4% compared to 1Q07.
4) Operating Income
Operating income decreased by 40.5% year-over-year to JPY411 million due to the increase in SG&A expenses from business expansion and loss from new business developments of JPY166 million.
5) Other Income (Expense)
Other income (expense) in 1Q08 were a net other expense of JPY102 million (1Q07 were other income of JPY65 million) as there were net loss of JPY7 million (1Q07 was net gains of JPY142 million) from available-for-sale securities.
6) Income before Income Tax Benefit
Income before income tax benefit was JPY310 million (down 59.1% YoY) as operating income decreased and we recorded expense in other income (expense).
7) Income Tax Benefit, Minority Interests and Equity in Net Loss of Equity Method Investees
Income tax expense in 1Q08 was JPY213 million mainly due to deferred tax expense of JPY127 million and the increase in income tax expenses. 1Q07 was an expense of JPY 175 million.
Minority interests in losses of subsidiaries in 1Q08 were JPY55 million related to GDX Japan Inc. and Trust Networks Inc., compared to minority interests in losses of subsidiaries of JPY 9 million in 1Q07.
Equity in net income of equity method investees in 1Q08 was JPY18 million, compared to equity in net loss of equity method investees of JPY 20 million in 1Q07.
8) Net Income
Net income was JPY169 million in 1Q08, a decrease of 70.4% compared to 1Q07.
c. Analysis by Service
1) Internet Connectivity and Outsourcing Services
Revenues from connectivity services for corporate use were JPY3,110 million in 1Q08 (up 4.6% YoY) as the contracted bandwidth from IP Service increased together with the steady increase in contracts of broadband services. As for IIJ Mobile service which was recently introduced was in line with our anticipation with approximately 10,000 contracts.
For connectivity services for home use, there were full contribution to revenues from hi-ho of 3 months in 1Q08 compared to 1 months in 1Q07.
Outsourcing services revenues increased by 19.4% compared to 1Q07 as strong demands from email related services, data center services and internet-VPN had continued.
As a result, revenues from connectivity and outsourcing services totaled JPY8,396 million in 1Q08 (up 22.2% YoY). The gross margin was JPY1,331 million (up 10.8% YoY) and the gross margin ratio was 15.9%.
<Connectivity and Outsourcing Services Revenues Breakdown and Cost>
| Three Months Ended June 30, 2007 | Three Months Ended June 30, 2008 | YoY % Change | |
| JPY millions | JPY millions | % | |
| Connectivity and outsourcing services revenues | 6,871 | 8,396 | 22.2 |
Connectivity service revenues (corporate use) | 2,973 | 3,110 | 4.6 |
| IP Service (including Data Center Connectivity Service) | 2,218 | 2,270 | 2.4 |
| IIJ FiberAccess/F and IIJ DSL/F (broadband services) | 616 | 713 | 15.8 |
| Others | 140 | 127 | (9.2) |
| Connectivity service revenues (home use) | 806 | 1,596 | 98.0 |
| Under IIJ brand | 282 | 258 | (8.8) |
| hi-ho | 339 | 1,203 | 254.7 |
| OEM | 185 | 136 | (26.5) |
| Outsourcing services revenues | 3,092 | 3,690 | 19.4 |
| Cost of connectivity and outsourcing services | 5,670 | 7,065 | 24.6 |
Backbone cost (*1) | 819 | 895 | 9.3 |
| Gross margin ratio | 17.5% | 15.9% | - |
<Numbers of Internet Connectivity Contracts and Total Contracted Bandwidth>
As of June 30, 2007 | As of June 30, 2008 | YoY % Change | |
| Contracts | Contracts | Contracts | |
| Connectivity services (corporate use) | 21,210 | 32,939 | 11,729 |
| IP Service (-99Mbps) | 773 | 854 | 81 |
| IP Service (100Mbps-999Mbps) | 168 | 203 | 35 |
| IP Service (1Gbps-) | 58 | 72 | 14 |
| IIJ Data Center Connectivity Service | 278 | 286 | 8 |
| IIJ FiberAccess/F and IIJ DSL/F | 18,252 | 24,466 | 6,214 |
| Others | 1,681 | 7,058 | 5,377 |
| Connectivity services (home use) | 555,946 | 467,453 | (88,493) |
| Under IIJ brand | 54,192 | 49,279 | (4,913) |
| hi-ho | 186,677 | 188,575 | 1,898 |
| OEM | 315,077 | 229,599 | (85,478) |
Total contracted bandwidth (*1) | 330.3 Gbps | 422.1Gbps | 91.8Gbps |
| (*1) | Total contracted bandwidth is calculated by multiplying the number of contracts with the each contracted bandwidth for IP Service, IIJ Data Center Connectivity Service and IIJ FiberAccess/F and IIJ DSL/F service respectively. |
2) SI
In 1Q08, one-time revenues from systems construction totaled JPY3,036 million and recurring revenues from systems operation and maintenance totaled JPY4,653 million. Gross margin from SI were JPY1,665 million (up 12.0% YoY) and gross margin ratio was 21.6%.
The order backlog for SI and equipment sales as of June 30, 2008 was JPY16,836 million (down 2.0% YoY). In 1Q07, we received order of a large-scaled SI project of JPY1,833 million which completed in 3Q07. The order backlog for systems construction including equipment sales were JPY5,081 million (down 34.2% YoY) and the order backlog for systems operation and maintenance were JPY11,755 million (up 24.3% YoY) compared to the end of 1Q07.
<SI Revenues, Cost of Revenues and Gross Margin Ratio>
| Three Months Ended June 30, 2007 | Three Months Ended June 30, 2008 | YoY % Change | |
| JPY millions | JPY millions | % | |
| SI revenues | 6,334 | 7,689 | 21.4 |
| Systems construction | 2,552 | 3,036 | 18.9 |
| Systems operation and maintenance | 3,782 | 4,653 | 23.0 |
| Cost of SI | 4,849 | 6,024 | 24.2 |
| SI gross margin ratio | 23.5% | 21.6% | — |
| SI and Equipment Sales Order Backlog | 17,174 | 16,836 | (2.0) |
3) Equipment sales
Revenues from equipment sales were JPY238 million (down 51.4% YoY). The gross margin for equipment sales was JPY39 million and the gross margin ratio increased to 16.4% from 13.6% in 1Q07.
<Equipment Sales Revenue and Cost>
| Three Months Ended June 30, 2007 | Three Months Ended June 30, 2008 | YoY % Change | |
| JPY million | JPY million | % | |
| Equipment sales revenues | 491 | 238 | (51.4) |
| Cost of equipment sales | 423 | 199 | (53.1) |
| Equipment sales gross margin ratio | 13.6% | 16.4% | — |
4) ATM Operation Business
Revenues from ATM Operation Business were JPY5 million. The gross margin for ATM operation business revenue were a loss of JPY10 million.
<ATM Operation Business Revenue and Cost>
| Three Months Ended June 30, 2007 | Three Months Ended June 30, 2008 | YoY % Change | |
| JPY million | JPY million | % | |
| ATM Operation Business revenues | — | 5 | — |
| Cost of ATM Operation Business | — | 15 | — |
2. Analysis for Financial Condition
(1) Assets, Liabilities and Total Shareholders’ Equity
As of June 30, 2008, total assets decreased by JPY3,768 million from the prior year end to JPY51,934 million.
For current assets, prepaid expenses increased by JPY931 million, mainly for bonus payments to our employees and maintenance expenses related to SI projects; account receivables decreased by JPY3,346 million, each from the respective amount as of March 31, 2008. The fair value of available-for-sale securities as of June 30, 2008 increased by JPY90 million to JPY934 million compared to March 31, 2008. For current liabilities, short-term borrowings decreased by JPY1,650 million (net) due to repayments; and accounts payable decreased by JPY1,965 million, each from the respective amount as of March 31, 2008.
Total shareholders’ equity as of June 30, 2008 was JPY24,991 million and shareholder’s equity ratio (shareholder’s equity/total assets) as of June 30, 2008 was 48.1%.
(2) Cash Flows
Cash and cash equivalents as of June 30, 2008 decreased by JPY1,528 million to JPY9,943 million, compared to JPY11,471 million as of March 31, 2008.
(Net cash provided by operating activities)
Net cash provided by operating activities in 1Q08 was JPY2,018 million, compared to net cash used in operating activities of JPY1,328 million in 1Q07. There were; operating income, a decrease in accounts receivable of JPY3,328 million, an increase in inventories, prepaid expenses and other current and non current assets of JPY832 million, a decrease in accounts payable of JPY1,811 million mainly related to SI projects and a payment of JPY512 million for income taxes.
(Net cash used in investing activities)
Net cash used in investing activities in 1Q08 was JPY825 million, compared to net cash used in investing activities of JPY3,520 million in 1Q07, mainly due to payment of JPY768 million for the purchase of property and equipment.
(Net cash used in financing activities)
Net cash used in financing activities in 1Q08 was JPY2,695 million, compared to net cash provided by financing activities of JPY3,898 million in 1Q07, mainly due to repayments of short-term borrowing with initial maturities over three months of JPY250 million (net), principal payments under capital leases of JPY839 million and a net decrease of JPY1,400 million in short-term borrowings with initial maturities less than three month.
3. Target for FY2008
For the near-term economic outlook, we must pay attention to the increasing risk of slow down in the Japanese economy, adversely affected by the recession in the U.S. economy caused by the subprime mortgage crisis, the fluctuation in stock and foreign exchanges and the trend in crude oil prices.
As for the Group, operating income decreased year-over-year as the increase in gross margin were weaker than the increase in SG&A expenses along with business expansion. There were a deferment of human resources related SI revenue and income which is expected to realize with the completion of SI projects in the coming quarters, in a quarter where systems construction revenues are seasonally low.
In the data telecommunications market where the Group belongs to, we believe demands for network and outsourcing services will steadily continue, as it is indispensable for corporate to utilize information technology, thus we need to pay attention to corporate spending on capital expenditure, outsourcing and others.
In such environment, we will work towards increasing recurring revenues by providing highly value-added total network solutions underlined by our IP related technological skills and make effort in increasing systems construction projects that are normally completed in the latter half of the fiscal year. From these, we will not revise our initial target for FY2008 announced on May 15, 2008.
4. Others
(1) Change of Condition in Consolidated Subsidiaries during the Three Months Ended June 30, 2008: None
(Change of Condition in Specific Consolidated Subsidiaries with the Change of Scope of Consolidation)
(2) Adoption of Simplified Accounting Method or Specific Accounting Principles for the preparation of consolidated financial statements: None
(3) Changes in Significant Accounting and Reporting Policies for Consolidated Financial Statements
From 1Q08, has prepared its quarterly consolidated financial statements under the generally accepted accounting principles in the United States of America ("U.S. GAAP"), in accordance with the provisions of article 93 "provisions for the terminology, form, and preparation methods for consolidated financial statements" (Ministry of Finance, ordinance No. 28, 1976).
From 1Q08, IIJ adopted Statement of Financial Accounting Standards (“SFAS”) No.157, “Fair Value Measurements”. This adoption of SFAS No.157 had no material effect upon the Company’s financial position or results of operations.
From 1Q08, “Value-added Service (“VAS”)” and “Other” of “Connectivity and VAS revenues” have been renamed to “Outsourcing Services” as it is considered more suitable to combine the two together as one service to indicate clearly that they are services that are provided to customers in purpose to operate customers” information networks. Related to this change, “Connectivity and VAS revenues” has been renamed to “Connectivity and Outsourcing Services revenues”. From 1Q08, we have disclosed Systems integration revenue breakdown into “systems construction” and “systems operation” in our consolidated statements of income. From 1Q08, we have disclosed revenues and costs related to ATM Operation Business.
(4) Going Concern (Unaudited)
For the quarter ended June 30, 2008: Nothing to be reported.
(5) Segments Information (Unaudited)
For the quarter ended June 30, 2008: There is no material segment informations for the quarter.
(6) Material Changes in Shareholders Equity (Unaudited)
For the quarter ended June 30, 2008: Nothing to be reported.