IIJIY Internet Initiative Japan Inc (PK)

Internet Initiative Japan Inc. ("IIJ") (Nasdaq:IIJI) (TSE:3774) today announced its consolidated financial results for the three months ended June 30, 2010 ("1Q10").1

Highlights of First Quarter FY2010 Financial Results

• Revenues were JPY15,813 million ($179 million), down 0.1% YoY. While connectivity and outsourcing services steadily grew, systems integration decreased mainly affected by the scale-down of a contract from a certain large contract.
• Operating income was JP266 million ($3 million), down 24.3% YoY, mainly due to the increase in SG&A expenses. Operating loss related to the ATM operation business decreased to JPY160 million ($2 million).
• Net income attributable to IIJ was JPY247 million ($3 million), up 36.8% YoY.

Overview of 1st Quarter FY2010 Financial Results and Business Outlook

"We are seeing slight recovery in systems construction, however, the Japanese economy is still struggling for full recovery and is difficult to foresee," said Koichi Suzuki, President and CEO of IIJ.

"As for our operating results, connectivity and outsourcing service revenues steadily increased by 2.0% YoY followed by the continuous demands for outsourcing services for cost reduction purposes. For systems integration ("SI"), there were scale-down of a contract from a certain large client for both construction and operation and maintenance. Systems construction revenue increased YOY with carried over projects from 4Q09, systems operation and maintenance decreased YoY. As a result, our revenues were nearly the same as 1Q09. And SG&A expenses increased as there were increases in personnel related and other expenses which increases annually at the beginning of the fiscal year.

"For the coming quarters, we expect connectivity and outsourcing services to grow steadily as continuous demands for bandwidth and outsourcing are anticipated and demands for cloud computing are gradually growing. In addition, we would like to pursue getting more systems construction projects toward the latter half of FY2010, which we hope will increase along with the recovery of the Japanese economy. We aim to complete the transaction to acquire the subsidiary of AT&T Japan LLC on September 1, 2010. We believe this business acquisition will broaden the basis of our business growth.

"We will make sure to do our best to maintain our position as one of the leading total network solution provider in Japan."

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

1st Quarter FY2010 Results of Operation

Revenues

Revenues were JPY15,813 million, down 0.1% YoY.

Connectivity and Outsourcing Services revenue were JPY9,304 million, up 2.0% YoY. Connectivity service for corporate use revenue was JPY3,466 million, up 0.5% YoY. While contracts over 1Gbps IP service increased by 21 contracts YoY, there were affects from cancellation due to corporate merger and migration of contracted lines from certain large clients that occurred during FY2009 and decrease in volume charge revenue which occurred in 4Q09. For IIJ mobile service, despite the cancellation from a large client during this first quarter, revenue steadily increased.

Connectivity service for home use revenue was JPY1,694 million, down 0.2% YoY. OEM service revenue decreased as one of our OEM clients terminated their service as planned which resulted in the decrease in our OEM service revenues.

Outsourcing service revenue was JPY4,144 million, up 4.1% YoY. Services such as email related services, services that prevent virus infection through a web browser and data center related services increased, respectively.

SI revenues were JPY6,259 million, down 4.7% YoY. SI transactions during the first quarter are seasonally low and there were scale-down of a contract from a certain large client (decrease of JPY0.6 billion in systems construction revenue and JPY0.7 billion in systems operation and maintenance revenue YoY, respectively). Systems construction revenue, a one-time revenue, was JPY2,011 million, up 11.5% YoY with carried over projects from 4Q09. Systems operation and maintenance, a recurring revenue, was JPY4,248 million, down 10.8% YoY as a result of scale-down in contract from a certain large client.

The order backlog for systems construction and equipment sales was JPY4,580 million, up 19.1% YoY and order backlog for systems operation and maintenance was JPY12,258 million, down 1.9% YoY as of June 30, 2010, respectively.

Equipment sales revenues were JPY144 million, up 5.7% YoY.

ATM Operation Business revenues were JPY106 million.

Cost and expense

Cost of revenues was JPY12,788 million, down 0.4% YoY.

Cost of Connectivity and Outsourcing Services revenue was JPY7,647 million, nearly the same as 1Q09. While personnel related and outsourcing related costs increased, circuit related cost decreased. Gross margin for connectivity and outsourcing service was JPY1,657 million, up 12.3% YoY and gross margin ratio was 17.8%, up 1.6% YoY.

Cost of SI revenues was JPY4,793 million, down 1.7% YoY. While network operation related and outsourcing related costs increased, purchasing cost decreased. Gross margin for SI was JPY1,466 million, down 13.2% YoY and gross margin ratio was 23.4%, down 2.3% YoY.

Cost of Equipment Sales revenues was JPY119 million, up 0.3% YoY. Gross margin for equipment sales was JPY25 million and gross margin ratio was 17.4%, up 4.5% YoY.

Cost of ATM Operation Business revenues was JPY229 million. Outsourcing costs were reduced.

SG&A and R&D Expenses

SG&A and R&D expenses were JPY2,759 million, up 4.3% YoY.

Sales and marketing expenses were JPY1,406 million, up 6.2% YoY mainly due to continuous increase in personnel related expenses.

General and administrative expenses were JPY1,265 million, up 1.6% YoY mainly due to the increase in depreciation expenses.

Research and development expenses were JPY88 million, up 15.1% YoY.

Operating income

Operating income was JPY266 million, down 24.3% YoY. While gross margin was almost the same as 1Q09, there were increases in SG&A and R&D expenses.

Other income (expenses)

Other income (expenses) was net other income of JPY14 million as dividends received and gains on sales of other investments increased and interest expense decreased.

Income before income tax expenses

Income before income tax expenses was JPY279 million, down 6.9% YoY.

Net Income

Income tax expense was JPY120 million. Deferred tax expenses was JPY88 million compared to expense of JPY186 million in 1Q09.

Equity in net income of equity method investees was JPY34 million.

Net income was JPY193 million, up 121.1% YoY.

Net income attributable to IIJ

Net loss attributable to noncontrolling interests was JPY54 million, related to GDX Japan Inc. and Trust Networks Inc.

Net income attributable to IIJ was JPY247 million, up 36.8% YoY.

Full FY2009 Financial Condition

Balance Sheets

As of June 30, 2010, the balance of total assets was JPY50,805 million, a decrease of JPY310 million from the balance as of March 31, 2010.

For current assets, as compared to each of the respective balances as of March 31, 2010, prepaid expense increased by JPY1,426 million, accounts receivables decreased by JPY1,761 million and inventories decreased by JPY169 million. As for current liabilities, as compared to each of the respective balances as of March 31, 2010, deferred income increased by JPY466 million and accounts payable decreased by JPY547 million. Noncurrent capital lease obligations decreased by JPY351 million to JPY3,306 million.

The balance of other investments as of June 30, 2010 was JPY2,642 million, an increase of JPY60 million from the balance as of March 31, 2010. The breakdown of other investments were JPY1,486 million in nonmarketable equity securities, JPY888 million in available-for-sale securities and JPY268 million in other.

As of June 30, 2010, the balance of non-amortized intangible assets (excluding telephone rights) such as goodwill was JPY2,806 million and the balance of amortized intangible assets was JPY2,560 million. The breakdown of non-amortized intangible assets were JPY2,614 million in goodwill and JPY192 million in trademark. The breakdown of amortized intangible assets were JPY2,486 million in customer relationships and JPY74 million in licenses.

Total IIJ shareholders' equity as of June 30, 2010 was JPY27,288 million, a decrease of JPY31 million from the balance as of March 31, 2010. IIJ Shareholders' equity ratio (IIJ shareholders' equity/total assets) as of June 30, 2010 was 53.7%.

Cash Flows

Cash and cash equivalents as of June 30, 2010 were JPY9,137 million compared to JPY9,897 million as of June 30, 2009.

Net cash provided by operating activities for 1Q10 was JPY2,274 million. While operating income was JPY266 million, decreased compared to 1Q09, there were changes in operating assets and liabilities during 1Q09, mainly resulting from the decrease in accounts receivable of JPY1,768 million, increase in inventories, prepaid expenses and other current and noncurrent assets of JPY1,084 million, increase in accrued expenses, other current and noncurrent liabilities of JPY1,085 million and decrease in accounts payable of JPY812 million.

Net cash used in investing activities for 1Q10 was JPY955 million mainly due to purchase of property and equipment of JPY913 million.

Net cash used in financing activities for 1Q10 was JPY928 million mainly due to principal payments under capital leases of JPY745 million and payments of JPY253 million for FY2009 year-end dividends.

FY2010 Financial Targets (announced on June 1, 2010)

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

Our financial results tend to be weak in the fist quarter of every fiscal year due to seasonal factor. For 1Q10, operating income level slightly decreased YoY as revenue and gross margin were almost the same but SG&A expenses increased as there were annual increases in personnel related and other expenses at the beginning of the fiscal year. Towards 4Q10 when revenue and income level become the largest, we will focus on getting more systems construction projects which we hope will gradually recover and accumulate recurring revenues followed by steady demands while keeping our control costs and expenses at an adequate level.

Considering the above, we have not changed our FY2010 financial targets announced on June 1, 2010.

Reconciliation of Non-GAAP Financial Measures

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

Presentation

Presentation Materials will be posted on our web site (http://www.iij.ad.jp/en/IR/) on August 13, 2010.

About Internet Initiative Japan Inc.

Founded in 1992, IIJ is one of Japan's leading Internet-access and comprehensive network solutions providers. IIJ and its group of companies provide total network solutions that mainly cater to high-end corporate customers. IIJ's services include high-quality systems integration and security services, Internet access, hosting/housing, and content design. Moreover, IIJ has built one of the largest Internet backbone networks in Japan, and between Japan and the United States. IIJ was listed on the U.S. NASDAQ Stock Market in 1999 and on the First Section of the Tokyo Stock Exchange in 2006.

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

Statements made in this press release regarding IIJ's or management's intentions, beliefs, expectations, or predictions for the future are forward-looking statements that are based on IIJ's and managements' current expectations, assumptions, estimates and projections about its business and the industry. These forward-looking statements, such as statements regarding FY2008 revenues and operating and net profitability, are subject to various risks, uncertainties and other factors that could cause IIJ's actual results to differ materially from those contained in any forward-looking statement. These risks, uncertainties and other factors include: IIJ's ability to maintain and increase revenues from higher-margin services such as systems integration and outsourcing services; the possibility that revenues from connectivity services may decline substantially as a result of competition and other factors; the ability to compete in a rapidly evolving and competitive marketplace; the impact on IIJ's profits of fluctuations in costs such as backbone costs and subcontractor costs; the impact on IIJ's profits of fluctuations in the price of available-for-sale securities; the impact of technological changes in its industry; IIJ's ability to raise additional capital to cover its indebtedness; the possibility that NTT, IIJ's largest shareholder, may decide to exercise substantial influence over IIJ; and other risks referred to from time to time in IIJ's filings on Form 20-F of its annual report and other filings with the United States Securities and Exchange Commission.

1Unless 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 translation of Japanese yen into U.S. dollars is solely for the convenience of readers outside of Japan. The rate used for the translation was JPY88.49 per US$1.00, which was the noon buying rate on June 30, 2010.

2Contracts of IIJ Mobile Service are of mobile data communication service for corporate use.

3IP Service revenues include revenues from the Data Center Connectivity Service.

4Revenue from mobile data communication service for home use is included in Connectivity service (home use).

5Depreciation and amortization includes impairment loss on other intangible assets. (See IIJ's consolidated financial statements for details).

CONTACT:  IIJ Investor Relations Office
          Yuko Kazama
          +81-3-5259-6500
          ir@iij.ad.jp 
          http://www.iij.ad.jp/en/IR

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