TOKYO, May 15, 2017 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") (NASDAQ:IIJI) (TSE:3774) today announced its full year ("FY2016") and fourth quarter ("4Q16") consolidated financial results for the fiscal year ended March 31, 2017 (from April 1, 2016 to March 31, 2017). 1
         
Highlights of Financial Results for FY2016
Revenues   JPY157,789 million   (up 12.2% YoY)
Operating Income   JPY5,134 million   (down 16.4% YoY)
Net Income attributable to IIJ   JPY3,167 million   (down 21.6% YoY)
         
Financial Targets for FY2017
Revenues   JPY176.0 billion   (up 11.5% YoY)
Operating Income   JPY6.5 billion   (up 26.6% YoY)
Net Income attributable to IIJ   JPY4.0 billion   (up 26.3% YoY)
Annual Cash Dividend   JPY27.00 per common share 
         

Overview of FY2016 Financial Results and Business Outlook

"In FY2016, a number of business developments, ranging from cloud, mobile, security and CDN 2 carried out in recent years, led to make our business growth fundamentals stronger. Our total revenue hit strong annual growth rate of 12.2%," said Eijiro Katsu, President and COO of IIJ.

"For cloud, more and more large-scale core enterprise systems of Japanese blue-chips are starting to make visible accumulation. Such projects include service platform for an online-ticketing company, unified business operation platform for a global manufacturing company's group and local governments' "Information Security Cloud." We've been also continuously expanding service functions for "IIJ GIO Infrastructure P2 ("GIO P2")" 3 to meet complex cloud demands of Japanese blue-chips. Our FY2016 cloud revenue was JPY15.7 billion and we expect it to increase to JPY18.0 billion in FY2017 with these undergoing transactions and further order accumulation."

"For mobile, while the competition has been severe, we continue to accumulate subscription mainly through sales partners and MVNE. 4 As of March 31, 2017, our total mobile subscription grew to 1.86 million, annual increase of 628 thousand subscriptions. Our mobile revenue also grew by 71.3% year over year to JPY26.7 billion. Our market share among MVNOs on net addition-base in Japan was approx. 24%. 5 We're very excited about becoming Japan's first full-MVNO service provider 6 as it will enable us to develop our own embedded SIMs which is a critical element for IoT 7 and preparing service cut-over in 4Q17."

"As for security, we continue to see strong demands especially for Sandbox and DDoS protection services which led our FY2016 security services revenues to grow by 10.9% year over year. In addition to the existing security services, we launched Security Operation Center services by leveraging our massive network log data and an ability to analyze them. For CDN, we established a joint venture 8 with 15 major Japanese broadcasting companies to provide reliable CDN platform. As we expect to be their primary IT provider, we should benefit from their requirement for significantly wide bandwidth."

"In terms of financial results, FY2016 operating income decreased year over year due to the overall cost increase along with the continuous business investments and a deterioration of SI gross margin. 9 However in the latter half, the revenue and income accumulated accordingly with our revised plan announced in November 2016 and SI profitability recovered in 4Q16 by mainly improving the productivity of outsourcing personnel and with the absence of large-scale unprofitable projects."

"For FY2017, we target the total revenue of JPY176.0 billion, 11.5% annual increase, with continuous expansion of monthly recurring revenue services including mobile, many flagship GIO P2 projects, security and more. With the accumulation of recurring network services revenues and improvement of SI profitability should absorb increasing costs; thus FY2017 operating income should turn to increase to JPY6.5 billion, up by 26.6% year over year," continued Katsu.

"IT systems requiring IoT and BigData should significantly increase in the middle-to-long term. We believe that the value IIJ can offer as a total platform provider covering, network, cloud, mobile, security, and SI should become significant," concluded Koichi Suzuki, Founder, Chairman and CEO of IIJ.

______________________

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.

2 CDN (Contents Distribution Network) is an optimized network to distribute contents such as pictures and videos over Internet.

3 "IIJ GIO Infrastructure P2" was launched in November 2015 as a renewed service platform to further meet Japanese enterprises IT needs are certainly contributing to promote cloud shift. The services offer public and private cloud resources seamlessly and provide closed connectivity between our cloud services to Amazon's AWS and Microsoft Azure services to meet hybrid and multi cloud systems needs.

4 MVNE (Mobile Virtual Network Enabler) provides business and service infrastructure to MVNOs.

5 Out of 5.9 hundred thousand total net addition for all MVNOs subscription from October to December 2016 in Japan, our net addition was 1.4 hundred thousand, making approx. 24% shares. These figures are according to the report published by the Ministry of Internal Affairs and Communications in March 2017.

6 For details, please refer to our press release titled "IIJ Begins to Engage in a Full MVNO for Enhanced MVNO Business" announced in August 2016.

7 IoT (Internet of Things) enables not only physical objects but also any "things" connected to network to exchange information automatically.

8 JOCDN Inc. which is our equity method investee with a 20% ownership.

9 As we disclosed in our financial target revision for FY2016 (announced in November 2016), low productivity of systems engineers in 1H16 and some unprofitable large-scale projects led to a sharp decline in systems integration profitability.

FY2016 Financial Results Summary
 
Operating Results Summary
  FY2015 FY2016 YoY Change
  JPY millions JPY millions %
Total revenues 140,648 157,789 12.2  
Network services 79,296 92,996 17.3  
Systems integration (SI) 54,188 57,749 6.6  
Equipment sales 3,275 2,994  (8.6 )
ATM operation business 3,889 4,050 4.1  
Total costs 115,993 132,542 14.3  
Network services 64,239 76,387 18.9  
Systems integration (SI) 46,226 50,992 10.3  
Equipment sales 2,969 2,735 (7.9 )
ATM operation business 2,559 2,428 (5.1 )
Total gross margin 24,655 25,247 2.4  
Network services 15,056 16,609 10.3  
Systems integration (SI) 7,963 6,756 (15.2 )
Equipment sales 306 260 (15.4 )
ATM operation business 1,330 1,622 22.0  
SG&A expenses and R&D 18,515 20,113 8.6  
Operating income 6,140 5,134  (16.4 )
Income before income tax expense 6,193 5,427  (12.4 )
Net income attributable to IIJ 4,038 3,167  (21.6 )

Segment Results Summary
  FY2015 FY2016
  JPY millions JPY millions
Total revenues 140,648   157,789  
Network services and SI business 137,142   154,126  
ATM operation business 3,889   4,050  
Elimination (383 ) (387 )
Operating income 6,140   5,134  
Network service and SI business 5,128   3,854  
ATM operation business 1,149   1,438  
Elimination (137 ) (157 )
         

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

FY2016 Revenues and Income

Revenues

Total revenues were JPY157,789 million, up 12.2% YoY (JPY140,648 million for FY2015).

Network services revenue was JPY92,996 million, up 17.3% YoY (JPY79,296 million for FY2015).

Revenues for Internet connectivity services for enterprise were JPY22,634 million, up 28.6% YoY from JPY17,597 million for FY2015, mainly due to an increase in mobile-related services revenues along with an expansion of MVNE business clients' business transaction.

Revenues for Internet connectivity services for consumers were JPY21,735 million, up 42.5% YoY from JPY15,256 million for FY2015, mainly due to the revenue growth of "IIJmio Mobile Services," consumer mobile services which offer inexpensive data communication and voice services with SIM cards.

Revenues for WAN services were JPY26,460 million, up 5.1% YoY compared to JPY25,177 million for FY2015.

Revenues for Outsourcing services were JPY22,167 million, up 4.2% YoY from JPY21,266 million for FY2015, mainly due to an increase in security-related services revenues.
 
Network Services Revenues Breakdown
  FY2015 FY2016 YoYChange
  JPY millions JPY millions %
Internet connectivity services (Enterprise) 17,597 22,634 28.6  
IP service*1 9,671 9,768 1.0  
IIJ FiberAccess/F and IIJ DSL/F 3,077 3,043 (1.1 )
IIJ Mobile service (Enterprise) 4,580 9,595 109.5  
IIJ Mobile MVNO Platform Service*2 2,063 6,441 212.2  
Others 269 228 (15.4 )
Internet connectivity services (Consumer) 15,256 21,735 42.5  
IIJ 12,719 19,634 54.4  
IIJmio Mobile Service*3 11,001 17,109 55.5  
hi-ho 2,537 2,101 (17.2 )
WAN services 25,177 26,460 5.1  
Outsourcing services 21,266 22,167 4.2  
Total network services 79,296 92,996 17.3  
¿*1. IP service revenues include revenues from the data center connectivity service.¿
*2. From 1Q16, the revenue from "IIJ Mobile MVNO Platform Service", which is included in "IIJ Mobile service (Enterprise)," is disclosed. "IIJ Mobile MVNO Platform Service" provides MVNO platform to our MVNE clients.
*3. From 1Q16, the revenue from "IIJmio Mobile Service" (formerly known as "IIJmio High Speed Mobile Service" until September 30, 2016), which is included in "Internet connectivity services (Consumer)" provided by IIJ, is disclosed.

Number of Contracts and Subscription for Connectivity Services*1
  as ofMar. 31, 2016 as of Mar. 31, 2017 YoY Change
Internet connectivity services (Enterprise) 510,067 933,496 423,429  
IP service (1Gbps-) 367 437 70  
IP service (100Mbps-999Mbps) 532 591 59  
IP service (-99Mbps) 690 658 (32 )
IIJ Data center connectivity service 270 253 (17 )
IIJ FiberAccess/F and IIJ DSL/F 75,932 72,605 (3327 )
IIJ Mobile service (Enterprise) 431,030 857,903 426,873  
IIJ Mobile MVNO Platform Service*2 250,757 582,250 331,493  
Others 1,246 1,049 (197 )
Internet connectivity services (Consumer) 1,230,600 1,409,259 178,659  
IIJ 1,084,295 1,275,875 191,580  
IIJmio Mobile Service*3 747,395 951,249 203,854  
hi-ho 146,305 133,384 (12,921 )
Total contracted bandwidth*4 2,315.9Gbps 2,773.3Gbps 457.4Gbps  
*1. Numbers in the table above show number of contracts except for "IIJ Mobile service (Enterprise)," "IIJ" and "hi-ho" which show number of subscriptions.
*2. From 1Q16, the number of subscription for "IIJ Mobile MVNO Platform Service", which is included in "IIJ Mobile service (Enterprise)", is disclosed.
*3. From 1Q16, the number of subscription for "IIJmio Mobile Service" (formerly known as "IIJmio High Speed Mobile Service" until September 30, 2016), which is included in "Internet connectivity services (Consumer)" provided by IIJ, is disclosed.
*4. Regarding IP service, data center connectivity service and IIJ FiberAccess/F and IIJ DSL/F of Internet connectivity services (Enterprise), total contracted bandwidths are calculated by multiplying number of contracts by contracted bandwidths respectively.
 

SI revenues were JPY57,749 million, up 6.6% YoY (JPY54,188 million for FY2015).

Systems construction revenue, a one-time revenue, was JPY22,626 million, up 7.0% YoY, mainly due to an increase and an expansion of the business transactions. Systems operation and maintenance revenue, a recurring revenue, was JPY35,123 million, up 6.3% YoY, mainly due to an increase in private cloud services' revenues and an increase of operation and maintenance which was shifted from systems construction projects.

Orders received for SI and equipment sales totaled JPY68,599 million, up 10.5% YoY; orders received for systems construction and equipment sales were JPY26,721 million, up 3.7% YoY and orders received for systems operation and maintenance were JPY41,877 million, up 15.4% YoY.

Order backlog for SI and equipment sales as of March 31, 2017 amounted to JPY41,501 million, up 23.3% YoY; order backlog for systems construction and equipment sales was JPY7,179 million, up 18.1% YoY and order backlog for systems operation and maintenance was JPY34,322 million, up 24.5% YoY.

Equipment sales revenues were JPY2,994 million, down 8.6% YoY (JPY3,275 million for FY2015) mainly due to the fluctuation in sales of devises such as mobile devices.

ATM operation business revenues were JPY4,050 million, up 4.1% YoY (JPY3,889 million for FY2015). As of March 31, 2017, 1,066 ATMs have been placed.

Cost and expense

Total cost of revenues was JPY132,542 million, up 14.3% YoY (JPY115,993 million for FY2015).

Cost of network services revenue was JPY76,387 million, up 18.9% YoY (JPY64,239 million for FY2015). There were an increase in outsourcing-related costs with our mobile infrastructure enhancement along with our mobile-related revenue increase, an increase in circuit-related costs along with our WAN services revenue increase, and an increase in network operation-related costs. Regarding NTT Docomo's interconnectivity charge for MVNO-related services, the charge based on their FY2015 actual cost was revised in March 2017 and it decreased by 14% (excluding the cost for borrowing SIM cards which arrangement took place during FY2016) year over year. Our estimate of 12% decrease, which rate had been applied to our mobile interconnectivity cost calculation from 1Q16, ended up in line with our initial estimate together with the cost for borrowing SIM. Gross margin was JPY16,609 million, up 10.3% YoY and gross margin ratio was 17.9% compared to 19.0% in FY2015.

Cost of SI revenues was JPY50,992 million, up 10.3% YoY (JPY46,226 million for FY2015). There were an increase in outsourcing-related and personnel-related costs along with an increase of large-scale SI transactions and an increase in network operation-related costs mainly along with the launch of "IIJ GIO Infrastructure P2." Gross margin was JPY6,756 million, down 15.2% YoY and gross margin ratio was 11.7% compared to 14.7% in FY2015. It was mainly due to profit deterioration resulted from low productivity of systems engineers and the delay in offering some functions of our ASP-type foreign exchange system, especially in 1H16.

Cost of equipment sales revenues was JPY2,735 million, down 7.9% YoY (JPY2,969 million for FY2015) along with the revenue decrease. Gross margin was JPY260 million (JPY306 million for FY2015) and gross margin ratio was 8.7% compared to 9.4% in FY2015.

Cost of ATM o peration b usiness revenues was JPY2,428 million, down 5.1% YoY (JPY2,559 million for FY2015). Gross margin was JPY1,622 million (JPY1,330 million for FY2015) and gross margin ratio was 40.1% compared to 34.2% in FY2015.

SG&A and R&D expenses

SG&A and R&D expenses in total were JPY20,113 million, up 8.6% YoY (JPY18,515 million for FY2015).

Sales and marketing expenses were JPY11,432 million, up 8.0% YoY (JPY10,589 million for FY2015) mainly due to increases in sales commission expenses of mobile-related services and advertising expenses.

General and administrative expenses were JPY8,215 million, up 10.0% YoY (JPY7,471 million for FY2015) mainly due to increases in office rent expenses.

Research and development expenses were JPY466 million, up 2.4% YoY (JPY455 million for FY2015).

Operating income

Operating income was JPY5,134 million, down 16.4% YoY (JPY6,140 million for FY2015).

Other income (expenses)

Other income (expenses) was an income of JPY293 million (an income of JPY53 million for FY2015), mainly because of net gain on sales of other investments of JPY217 million (JPY24 million for FY2015), distribution from fund investment of JPY321 million (included in other-net of JPY315 million, JPY209 million for FY2015), dividend income of JPY118 million from other investments (JPY93 million for FY2015), interest expense of JPY304 million (JPY241 million for FY2015) and foreign exchange losses of JPY45 million (JPY71 million for FY2015).

Income before income tax expenses

Income before income tax expenses was JPY5,427 million, down 12.4% YoY (JPY6,193 million for FY2015).

Net income

Income tax expense was JPY2,225 million (JPY2,183 million for FY2015).

Equity in net income of equity method investees was JPY130 million (JPY180 million for FY2015) mainly due to net income of Internet Multifeed Co.

As a result of the above, net income was JPY3,332 million, down 20.5% YoY (JPY4,190 million for FY2015).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY165 million mainly related to net income of Trust Networks Inc. (JPY152 million for FY2015).

Net income attributable to IIJ was JPY3,167 million, down 21.6% YoY (JPY4,038 million for FY2015).

FY2016 Balance Sheets and Cash Flows

Balance sheets

As of March 31, 2017, the balance of total assets was JPY137,395 million, increased by JPY19,560 million from the balance as of March 31, 2016 of JPY117,835 million.

As of March 31, 2017, the balance of current assets was JPY63,722 million, increased by JPY10,316 million from the balance as of March 31, 2016 of JPY53,406 million. The major breakdown of current assets was an increase in accounts receivable by JPY3,637 million to JPY27,384 million, an increase in cash and cash equivalents by JPY2,389 million to JPY21,959 million, an increase in prepaid expenses by JPY2,841 million to JPY7,611 million and an increase in inventories by JPY794 million to JPY2,798 million. As of March 31, 2017, the balance of noncurrent assets was JPY73,673 million, increased by JPY9,244 million from the balance as of March 31, 2016 of JPY64,429 million. The major breakdown of noncurrent assets was an increase in property and equipment by JPY5,451 million to JPY39,775 million, an increase in other investments by JPY1,976 million to JPY7,925 million mainly due to an increase in the fair value of available-for-sale securities and increase in prepaid expenses-noncurrent by JPY1,620 million to JPY6,607 million. Other investments as of March 31, 2017, consisted of JPY5,780 million in available-for-sale securities (including JPY5,464 million of strategic shareholdings), JPY1,124 million in nonmarketable equity securities and JPY1,021 million in investments in funds, including some through a trust. As of March 31, 2017, the balance of non-amortized intangible assets was JPY6,220 million, decreased by JPY82 million from the balance as of March 31, 2016 of JPY6,302 million. The major breakdown of non-amortized intangible assets was JPY6,170 million in goodwill and a decrease by JPY81 million to JPY15 million in trademark. The balance of amortized intangible assets, which was customer relationships, was JPY3,036 million, decreased by JPY380 million from the balance as of March 31, 2016 of JPY3,417 million.

As of March 31, 2017, the balance of current liabilities was JPY39,983 million, increased by JPY3,917 million from the balance as of March 31, 2016 of JPY36,066 million. The major breakdown of current liabilities was an increase in accounts payable (trade and other) by JPY1,557 million to JPY16,962 million and an increase in capital lease obligations-current portion by JPY864 million to JPY4,819 million. As of March 31, 2017, the balance of noncurrent liabilities was JPY30,032 million, increased by JPY13,607 million from the balance as of March 31, 2016 of JPY16,425 million. The major breakdown of noncurrent liabilities was an increase in long-term borrowings by JPY8,500 million to JPY8,500 million and an increase in capital lease obligations-noncurrent by JPY2,605 million to JPY10,385 million.

As of March 31, 2017, the balance of total IIJ shareholders' equity was JPY66,742 million, increased by JPY1,897 million from the balance as of March 31, 2016 of JPY64,845 million. There were an increase in retained earnings by JPY2,041 million to JPY4,512 million, an increase in accumulated other comprehensive income by JPY1,303 million to JPY2,500 million mainly due to an increase the fair value of available-for-sale securities and an increase in treasury stock by JPY1,505 million to JPY1,897 million due to the repurchase of own shares, authorized at the meeting of IIJ's Board of Directors held on November 4, 2016. IIJ shareholders' equity ratio (total IIJ shareholders' equity divided by total assets) as of March 31, 2017 was 48.6%.

Cash flows

Cash and cash equivalents as of March 31, 2017 were JPY21,959 million (JPY19,569 million as of March 31, 2016).

Net cash provided by operating activities for FY2016 was JPY7,368 million (net cash provided by operating activities of JPY12,052 million for FY2015.) There were net income of JPY3,332 million, depreciation and amortization of JPY10,894 million and net cash out flow of JPY7,026 million from changes in operating assets and liabilities. As for changes in operating assets and liabilities, there were an increase in accounts receivable mainly due to revenue growth, an increase in prepaid expenses (including prepaid expenses-noncurrent) and payments in relation to up front payment for software licenses and maintenance cost for service facilities.

Net cash used in investing activities for FY2016 was JPY7,376 million (net cash used in investing activities of JPY8,377 million for FY2015), mainly due to payments for purchase of property and equipment of JPY10,624 million (JPY10,899 million for FY2015) and proceeds from sales of property and equipment, which include sales and leaseback, of JPY3,046 million (JPY2,574 million for FY2015).

Net cash provided by financing activities for FY2016 was JPY2,492 million (net cash used in financing activities of JPY5,201 million for FY2015), mainly due to proceeds from long-term borrowings of JPY8,500 million, proceeds from financing in relation to procurement of software license of JPY1,498 million, principal payments under capital leases of JPY4,820 million (JPY4,194 million for FY2015), payments for purchase of treasury stock of JPY1,505 million and FY2015 year-end and FY2016 interim dividend payments of JPY1,126 million (JPY1,011 million for FY2015).

FY2017 Financial Targets

Our financial targets for the fiscal year ending March 31, 2018 (FY2017) are as follows:
         
      (JPY in billions)
  Revenues Operating Income Income before IncomeTax Expense Net Income attributable to IIJ
1H FY2017 Target 82.4 2.0 2.0 1.1
Full FY2017 Target 176.0 6.5 6.5 4.0
         

With the continuous expansion of Japanese economy, Japanese enterprises' ICT-related investment and spending should continuously grow during FY2017. Regarding consumer market in Japan, we expect the inexpensive SIM card services market to further penetrate. Based on these, we expect our operating income to improve with continuous expansion of revenue and gross margin.

We target total revenue of JPY176.0 billion, up 11.5% year over year. We expect both enterprise and consumer mobile services to further increase, cloud-related revenue to reach to JPY18.0 billion, revenue contribution from a large-scale local government's information security cloud project and other monthly recurring revenue services such as Internet connectivity, outsourcing, WAN and systems operation and maintenance revenue to continuously accumulate.

We target operating income of JPY6.5 billion, up 26.6% year over year. While SG&A expenses such as sales commission, advertisement, and personnel related fees are to increase continuously, we expect network services gross margin continuous expansion and systems integration gross margin improvement, approximately 1 point increase from FY2016, should absorb such increase in SG&A and lead to an operating income increase.

We target income before income tax expense of JPY6.5 billion, up 19.8% year over year.

We target net income attributable to IIJ of JPY4.0 billion, up 26.3% year over year, considering taxes calculated by a normal statutory rate and income of equity method investees and non-controlling interests.

FY2017 Dividend Forecast

Our FY2017 dividend forecast is as follows:
  Interim Year-end Full Year
FY2017 Dividend (forecast) JPY13.50 (forecast) JPY13.50 (forecast) JPY27.00 (forecast)
FY2016 Dividend (scheduled) JPY13.50 (paid) JPY13.50 (scheduled) JPY27.00 (scheduled)

FY2016 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.
 
Adjusted EBITDA
  FY2015 FY2016
  JPY millions JPY millions
Adjusted EBITDA 16,073   16,109  
Depreciation and Amortization (9,922 ) (10,894 )
Impairment loss on other intangible assets (11 ) (81 )
Operating Income 6,140   5,134  
Other Income 53   293  
Income Tax Expense 2,183   2,225  
Equity in Net Income of Equity Method Investees 180   130  
Net income 4,190   3,332  
Less: Net income attributable to noncontrolling interests (152 ) (165 )
Net Income attributable to IIJ 4,038   3,167  

CAPEX
  FY2015 FY2016
  JPY millions JPY millions
CAPEX, including capital leases 14,812 16,531
Acquisition of Assets by Entering into Capital Leases 6,118 8,302
Purchase of Property and Equipment 8,694 8,229
     

Presentation

Presentation materials will be posted on our web site ( http://www.iij.ad.jp/en/ir/) on May 15, 2017.

About Internet Initiative Japan Inc.

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

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 FY2016 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.

 
Internet Initiative Japan Inc.
Consolidated Balance Sheets (Unaudited)
(As of March 31, 2016 and March 31, 2017)
         
  As of March 31, 2016   As of March 31, 2017  
  Thousands of JPY   Thousands of JPY  
ASSETS        
CURRENT ASSETS:        
Cash and cash equivalents 19,569,095     21,958,591    
Accounts receivable, net of allowance for doubtful accounts of JPY 74,229 thousand and JPY 107,684 thousand at March 31, 2016 and March 31, 2017, respectively 23,746,683     27,383,692    
Inventories 2,003,573     2,798,054    
Prepaid expenses—current 4,769,988     7,610,925    
Deferred tax assets—current 1,481,651     1,298,469    
Other current assets, net of allowance for doubtful accounts of JPY 15,693 thousand and JPY 15,192 thousand at March 31, 2016 and March 31, 2017, respectively 1,834,951     2,672,008    
Total current assets 53,405,941     63,721,739    
INVESTMENTS IN EQUITY METHOD INVESTEES 2,979,652     3,150,175    
OTHER INVESTMENTS 5,948,741     7,924,914    
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of JPY 45,345,543 thousand and JPY 50,566,983 thousand at March 31, 2016 and March 31, 2017, respectively 34,324,150     39,775,444    
GOODWILL 6,169,609     6,169,609    
OTHER INTANGIBLE ASSETS—Net 3,549,459     3,087,017    
GUARANTEE DEPOSITS 3,084,681     3,060,365    
DEFERRED TAX ASSETS—Noncurrent 224,316     80,566    
NET INVESTMENT IN SALES-TYPE LEASES—Noncurrent 2,444,848     2,047,682    
Prepaid expenses—Noncurrent 4,987,193     6,607,437    
OTHER ASSETS, net of allowance for doubtful accounts of JPY 61,593 thousand and JPY 61,877 thousand at March 31, 2016 and March 31, 2017, respectively 716,314     1,770,201    
TOTAL 117,834,904     137,395,149    
         
         
  As of March 31, 2016   As of March 31, 2017  
  Thousands of JPY   Thousands of JPY  
LIABILITIES AND SHAREHOLDERS' EQUITY        
CURRENT LIABILITIES:        
Short-term borrowings 9,250,000     9,250,000    
Capital lease obligations—current portion 3,954,386     4,818,723    
Accounts payable—trade 13,906,703     14,653,065    
Accounts payable—other 1,497,767     2,308,790    
Income taxes payable 1,078,412     1,075,745    
Accrued expenses 2,932,653     2,755,581    
Deferred income—current 2,528,885     3,750,542    
Other current liabilities 917,300     1,370,661    
Total current liabilities 36,066,106     39,983,107    
LONG-TERM BORROWINGS -     8,500,000    
CAPITAL LEASE OBLIGATIONS—Noncurrent 7,779,367     10,384,643    
ACCRUED RETIREMENT AND PENSION COSTS—Noncurrent 3,581,426     3,532,965    
DEFERRED TAX LIABILITIES—Noncurrent 710,055     963,845    
DEFERRED INCOME—Noncurrent 3,092,562     3,656,612    
OTHER NONCURRENT LIABILITIES 1,261,413     2,993,777    
Total Liabilities 52,490,929     70,014,949    
COMMITMENTS AND CONTINGENCIES        
         
SHAREHOLDERS' EQUITY:        
Common-stock—authorized, 75,520,000 shares; issued and outstanding, 46,711,400 shares at March 31, 2016 and March 31, 2017, respectively 25,509,499     25,509,499    
Additional paid-in capital 36,059,833     36,117,511    
Retained earnings 2,471,276     4,511,945    
Accumulated other comprehensive income 1,196,669     2,499,700    
Treasury stock —758,709 shares and 1,650,909 shares held by the company at March 31, 2016 and March 31, 2017, respectively (392,070 )   (1,896,784 )  
Total Internet Initiative Japan Inc. shareholders' equity 64,845,207     66,741,871    
NONCONTROLLING INTERESTS 498,768     638,329    
Total equity 65,343,975     67,380,200    
TOTAL 117,834,904     137,395,149    
         

 
Internet Initiative Japan Inc.
Consolidated Statements of Income and Consolidated Statements of Comprehensive Income (Unaudited)
(For the fiscal year ended March 31, 2016 and March 31, 2017)
         
  Fiscal Year Ended   Fiscal Year Ended  
  March 31, 2016   March 31, 2017  
  Thousands of JPY   Thousands of JPY  
REVENUES:        
Network services:        
Internet connectivity services (enterprise) 17,597,343     22,633,739    
Internet connectivity services (consumer) 15,255,596     21,734,968    
WAN services 25,176,730     26,459,697    
Outsourcing services 21,265,895     22,167,432    
Total 79,295,564     92,995,836    
Systems integration:        
Systems construction 21,144,677     22,625,753    
Systems operation and maintenance 33,043,669     35,122,940    
Total 54,188,346     57,748,693    
Equipment sales 3,275,220     2,994,449    
ATM operation business 3,888,878     4,050,081    
Total revenues 140,648,008     157,789,059    
COSTS AND EXPENSES:        
Cost of network services 64,239,600     76,386,849    
Cost of systems integration 46,225,629     50,992,480    
Cost of equipment sales 2,968,711     2,735,169    
Cost of ATM operation business 2,558,883     2,427,870    
Total costs 115,992,823     132,542,368    
Sales and marketing 10,588,887     11,431,467    
General and administrative 7,470,746     8,214,598    
Research and development 455,198     466,319    
Total costs and expenses 134,507,654     152,654,752    
OPERATING INCOME 6,140,354     5,134,307    
OTHER INCOME (EXPENSES):        
Dividend income 93,054     117,567    
Interest income 27,587     35,259    
Interest expense (241,057 )   (303,685 )  
Foreign exchange gain (loss), net (71,270 )   (45,116 )  
Net gain on sales of other investments 23,765     216,646    
Loss on sales of stocks of an affiliate -     (12,070 )  
Impairment of other investments (14,729 )   (30,554 )  
Other —net 235,630     314,806    
Other income —net 52,980     292,853    
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES 6,193,334     5,427,160    
INCOME TAX EXPENSE  2,183,531     2,224,880    
EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES 180,219     129,791    
NET INCOME 4,190,022     3,332,071    
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (151,740 )   (165,561 )  
NET INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC. 4,038,282     3,166,510    
         
         
  Fiscal Year Ended   Fiscal Year Ended  
  March 31, 2016   March 31, 2017  
NET INCOME PER SHARE        
BASIC WEIGHTED-AVERAGE NUMBER OF SHARES (shares) 45,950,098     45,652,981    
DILUTED WEIGHTED-AVERAGE NUMBER OF SHARES (shares) 46,043,383     45,772,470    
BASIC WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs) 91,900,196     91,305,962    
DILUTED WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs) 92,086,766     91,544,940    
BASIC NET INCOME PER SHARE  (JPY) 87.88     69.36    
DILUTED NET INCOME PER SHARE  (JPY) 87.71     69.18    
BASIC NET INCOME PER ADS  EQUIVALENT  (JPY) 43.94     34.68    
DILUTED NET INCOME PER ADS  EQUIVALENT  (JPY) 43.85     34.59    
         
 
Consolidated Statements of Comprehensive Income (Unaudited)      
  Fiscal Year Ended   Fiscal Year Ended  
  March 31, 2016   March 31, 2017  
  Thousands of JPY   Thousands of JPY  
NET INCOME 4,190,022     3,332,071    
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:        
Foreign currency translation adjustments (67,652 )   (181,110 )  
Unrealized holding gain (loss) on securities (275,952 )   1,280,095    
Defined benefit pension plans (394,418 )   204,046    
TOTAL COMPREHENSIVE INCOME  3,452,000     4,635,102    
LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (155,698 )   (165,561 )  
COMPREHENSIVE INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC. 3,296,302     4,469,541    
         

 
Internet Initiative Japan Inc.  
Consolidated Statements of Shareholders' Equity (Unaudited)  
(For the fiscal year ended March 31, 2016 and March 31, 2017)  
                   
  Total equity Internet Initiative Japan Inc. shareholders' equity NON CONTROLLING INTERESTS  
Retained earnings (Accumulated deficit) Accumulated other comprehensive income (loss) Shares of common stock outstanding Common stock Treasury stock Additional paid-in capital  
 
  Thousands of JPY Thousands of JPY Thousands of JPY Shares Thousands of JPY Thousands of JPY Thousands of JPY Thousands of JPY  
BALANCE, MARCH 31, 2015 62,843,780   (556,162 ) 1,938,649   46,701,000 25,499,857 (392,070 ) 36,014,128   339,378    
Subsidiary stock issuance 3,692               3,692    
Issuance of common stock upon exercise of stock options 10       10,400 9,642   (9,632 )    
Stock-based compensation 55,337             55,337      
Net Income 4,190,022   4,038,282             151,740    
Other Comprehensive income (loss), net of tax (738,022 )   (741,980 )         3,958    
Dividends paid (1,010,844 ) (1,010,844 )              
BALANCE, MARCH 31, 2016 65,343,975   2,471,276   1,196,669   46,711,400 25,509,499 (392,070 ) 36,059,833   498,768    
Dividends paid to noncontrolling interests (26,000 )             (26,000 )  
Stock-based compensation 57,678             57,678      
Net Income 3,332,071   3,166,510             165,561    
Other Comprehensive income (loss), net of tax 1,303,031     1,303,031              
Dividends paid (1,125,841 ) (1,125,841 )              
Payments for purchase of treasury stock (1,504,714 )         (1,504,714 )      
BALANCE, MARCH 31, 2017 67,380,200   4,511,945   2,499,700   46,711,400 25,509,499 (1,896,784 ) 36,117,511   638,329    
                   

 
Internet Initiative Japan Inc.
Consolidated Statements of Cash Flows (Unaudited)
(For the fiscal year ended March 31, 2016 and March 31, 2017)
         
  Fiscal Year Ended   Fiscal Year Ended  
  March 31, 2016   March 31, 2017  
  Thousands of JPY   Thousands of JPY  
OPERATING ACTIVITIES:        
Net income 4,190,022     3,332,071    
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization 9,921,555     10,893,657    
Impairment loss on other intangible assets 11,000     81,000    
Provision for retirement and pension costs, less payments 200,871     252,825    
Provision for allowance for doubtful accounts 48,407     68,300    
Gain on sales of property and equipment (38,219 )   (31,809 )  
Loss on disposal of property and equipment 66,169     170,971    
Net gain on sales of other investments (23,765 )   (216,646 )  
Impairment of other investments 14,729     30,554    
Loss on sales of stocks of an affiliate -     12,070    
Foreign exchange loss (gain), net (51,727 )   18,152    
Equity in net income of equity method investees, less dividends received (124,141 )   (78,709 )  
Deferred income tax expense (benefit) 249,115     (94,343 )  
Others (12,341 )   (44,667 )  
Changes in operating assets and liabilities:        
Increase in accounts receivable (1,565,857 )   (3,751,392 )  
Decrease in net investment in sales-type lease — noncurrent 98,511     492,530    
Increase in inventories (777,192 )   (800,296 )  
Increase in prepaid expenses (1,083,665 )   (2,859,763 )  
Increase in other current and noncurrent assets (1,485,629 )   (3,317,968 )  
Increase in accounts payable 1,760,207     827,792    
Increase (decrease) in income taxes payable 579,414     (2,621 )  
Decrease in accrued expenses (32,288 )   (167,597 )  
Increase in deferred income—current 418,162     1,257,870    
Increase in deferred income—noncurrent 201,897     604,269    
Increase (decrease) in other current and noncurrent liabilities (513,647 )   691,442    
Net cash provided by operating activities 12,051,588     7,367,692    
INVESTING ACTIVITIES:        
Purchase of property and equipment (10,898,533 )   (10,623,993 )  
Proceeds from sales of property and equipment 2,574,449     3,046,189    
Purchase of available-for-sale securities (59,490 )   -    
Purchase of other investments (376,067 )   (410,587 )  
Investment in an equity method investee (338,166 )   (99,000 )  
Proceeds from sales of available-for-sale securities 141,235     -    
Proceeds from sales of other investments 808,465     539,389    
Payments of guarantee deposits (348,005 )   (50,345 )  
Refund of guarantee deposits 21,567     92,002    
Payments for refundable insurance policies (56,362 )   (56,476 )  
Refund from insurance policies 10,108     -    
Proceeds from subsidies 200,000     200,000    
Other (56,029 )   (13,000 )  
Net cash used in investing activities (8,376,828 )   (7,375,821 )  
         
  Fiscal Year Ended   Fiscal Year Ended  
  March 31, 2016   March 31, 2017  
  Thousands of JPY   Thousands of JPY  
FINANCING ACTIVITIES:        
Proceeds from issuance of short-term borrowings with initial maturities over three months and long-term borrowings 1,550,000     8,550,000    
Repayments of short-term borrowings with initial maturities over three months (1,550,000 )   (50,000 )  
Principal payments under capital leases (4,194,215 )   (4,819,530 )  
Proceeds from other noncurrent liabilities -     1,498,306    
Repayments of other noncurrent liabilities -     (30,122 )  
Proceeds from issuance of subsidiaries stock to noncontrolling interests 3,692     -    
Payments for purchase of treasury stock -     (1,504,714 )  
Dividends paid (1,010,844 )   (1,125,841 )  
Other 10     (26,000 )  
Net cash provided by (used in) financing activities (5,201,357 )   2,492,099    
         
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 2,059     (94,474 )  
         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,524,538 )   2,389,496    
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 21,093,633     19,569,095    
CASH AND CASH EQUIVALENTS, END OF THE PERIOD 19,569,095     21,958,591    
         
ADDITIONAL CASH FLOW INFORMATION:        
Interest paid 241,260     302,035    
Income taxes paid 1,377,753     2,462,106    
         
NONCASH INVESTING AND FINANCING ACTIVITIES:        
Acquisition of assets by entering into capital leases 8,065,674     8,301,695    
Facilities purchase liabilities 1,497,767     2,308,790    
Asset retirement obligation 45,169     31,980    
         
         

Fourth Quarter FY2016 Consolidated Financial Results (3 months)

The following tables are highlight data of fourth quarter FY2016 (3 months) consolidated financial results (unaudited, for the three months ended March 31, 2017).
 
Operating Results Summary
  4Q15 4Q16 YoY % Change
  JPY millions JPY millions  
Total Revenues: 41,266 44,187 7.1  
Network Services 21,080 24,515 16.3  
Systems Integration (SI) 18,267 17,891 (2.1 )
Equipment Sales 910 787 (13.6 )
ATM Operation Business 1,009 994 (1.4 )
Cost of Revenues: 34,405 36,770 6.9  
Network Services 17,161 20,113 17.2  
Systems Integration (SI) 15,771 15,348 (2.7 )
Equipment Sales 844 711 (15.7 )
ATM Operation Business 629 598 (4.9 )
SG&A Expenses and R&D 4,794 5,438 (13.4 )
Operating Income 2,067 1,979 (4.3 )
Income before Income Tax Expense 2,016 1,994 (1.1 )
Net Income attributable to IIJ 1,465 1,256 (14.3 )

Network Service Revenue Breakdown
  4Q15 4Q16 YoY % Change
  JPY millions JPY millions  
Internet Connectivity Service (Enterprise) 4,727 6,173 30.6  
IP Service*1 2,453 2,438 (0.6 )
IIJ FiberAccess/F and IIJ DSL/F 768 763 (0.6 )
IIJ Mobile Service 1,440 2,915 (102.4 )
IIJ Mobile MVNO Platform Service*2 780 2,083 167.2  
Others 66 57 (14.3 )
Internet Connectivity Service (Consumer) 4,548 5,832 28.2  
IIJ 3,952 5,344 35.2  
IIJmio Mobile Service*3 3,406 4,672 37.2  
hi-ho 596 488 (18.2 )
WAN Services 6,350 6,612 4.1  
Outsourcing Services 5,455 5,899 8.1  
Network Services Revenues 21,080 24,515 16.3  
*1 IP service revenues include revenues from the data center connectivity service.
*2 From 1Q16, the revenue from "IIJ Mobile MVNO Platform Service", which is included in "IIJ Mobile service (Enterprise), " is disclosed. "IIJ Mobile MVNO Platform Service" provides MVNO platform to our MVNE clients.
*3 From 1Q16, the revenue from "IIJmio Mobile Service" (formerly known as "IIJmio High Speed Mobile Service" until September 30, 2016), which is included in "Internet connectivity services (Consumer)" provided by IIJ, is disclosed.
 

Reconciliation of Non-GAAP Financial Measures (4th Quarter FY2016 (3 months))

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.
 
Adjusted EBITDA
  4Q15 4Q16
  JPY millions JPY millions
Adjusted EBITDA 4,706   4,948  
Depreciation and Amortization (2,628 ) (2,888 )
Impairment loss on other intangible assets (11 ) (81 )
Operating Income 2,067   1,979  
Other Income (51 ) 15  
Income Tax Expense 487   759  
Equity in Net Income of Equity Method Investees (27 ) 61  
Net income 1,502   1,296  
Less: Net income attributable to noncontrolling interests (37 ) (39 )
Net Income attributable to IIJ 1,465   1,257  
         

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.
 
CAPEX
  4Q15 4Q16
  JPY millions JPY millions
CAPEX, including capital leases 2,601 4,273
Acquisition of Assets by Entering into Capital Leases 2,361 2,459
Purchase of Property and Equipment 240 1,814

Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Income and Quarterly Consolidated Statements of Comprehensive Income (Unaudited)
(Three Months ended March 31, 2016 and March 31, 2017)
           
  Three Months Ended   Three Months Ended  
  March 31, 2016     March 31, 2017  
  Thousands of JPY     Thousands of JPY  
REVENUES:          
Network services:          
Internet connectivity services (enterprise) 4,726,723       6,172,534    
Internet connectivity services (consumer) 4,547,691       5,832,016    
WAN services 6,350,368       6,611,961    
Outsourcing services 5,455,425       5,898,789    
Total 21,080,207       24,515,300    
Systems integration:          
Systems construction 9,597,461       8,652,946    
Systems operation and maintenance 8,669,512       9,237,719    
Total 18,266,973       17,890,665    
Equipment sales 910,525       786,800    
ATM operation business 1,008,732       994,342    
Total revenues 41,266,437       44,187,107    
COST AND EXPENSES:          
Cost of network services 17,161,110       20,113,321    
Cost of systems integration 15,771,218       15,348,322    
Cost of equipment sales 843,626       710,907    
Cost of ATM operation business 628,697       597,775    
Total costs 34,404,651       36,770,325    
Sales and marketing 2,746,697       3,039,453    
General and administrative 1,938,658       2,286,433    
Research and development 109,320       111,908    
Total costs and expenses 39,199,326       42,208,119    
OPERATING INCOME 2,067,111       1,978,988    
OTHER INCOME (EXPENSE):          
Dividend income 4,806       11,231    
Interest income 12,216       8,478    
Interest expense (70,295 )     (85,481 )  
Foreign exchange gain (loss), net (59,997 )     (22,044 )  
Net gain on sales of other investments -       2,708    
Loss on sales of stocks of an affiliate -       (12,070 )  
Impairment of other investments (14,729 )     -    
Other—net 76,582       112,320    
Other income —net (51,417 )     15,142    
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES 2,015,694       1,994,130    
INCOME TAX EXPENSE 486,595       759,028    
EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES (26,604 )     60,547    
NET INCOME 1,502,495       1,295,649    
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (37,036 )     (39,400 )  
NET INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC. 1,465,459       1,256,249    
           
  Three Months Ended   Three Months Ended  
  March 31, 2016   March 31, 2017  
NET INCOME PER SHARE      
BASIC WEIGHTED-AVERAGE NUMBER OF SHARES (shares) 45,952,691     45,060,491    
DILUTED WEIGHTED-AVERAGE NUMBER OF SHARES (shares) 46,053,964     45,192,000    
BASIC WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs) 91,905,382     90,120,982    
DILUTED WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs) 92,107,928     90,384,000    
BASIC NET INCOME PER SHARE  (JPY) 31.89     27.88    
DILUTED NET INCOME PER SHARE  (JPY) 31.82     27.80    
BASIC NET INCOME PER ADS EQUIVALENT (JPY) 15.95     13.94    
DILUTED NET INCOME PER ADS EQUIVALENT (JPY) 15.91     13.90    
           
           
Quarterly Consolidated Statements of Comprehensive Income (Unaudited)        
  Three Months Ended   Three Months Ended  
  March 31, 2016   March 31, 2017  
  Thousands of JPY   Thousands of JPY  
NET INCOME 1,502,495     1,295,649    
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:        
Foreign currency translation adjustments 6,892     274,048    
Unrealized holding gain (loss) on securities (190,829 )   359,360    
Defined benefit pension plans (393,172 )   193,168    
TOTAL COMPREHENSIVE INCOME  925,386     2,122,225    
LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (37,036 )   (39,400 )  
COMPREHENSIVE INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC. 888,350     2,082,825    

 
Internet Initiative Japan Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Three Months ended March 31, 2016 and March 31, 2017)
           
    Three Months Ended   Three Months Ended   
    March 31, 2016   March 31, 2017  
    Thousands of JPY   Thousands of JPY  
  OPERATING ACTIVITIES:        
  Net income 1,502,495     1,295,649    
  Adjustments to reconcile net income to net cash provided by operating activities:        
  Depreciation and amortization 2,627,787     2,887,608    
  Impairment loss on other intangible assets 11,000     81,000    
  Provision for retirement and pension costs, less payments 59,257     63,902    
  Provision for allowance for doubtful accounts 21,715     48,311    
  Gain on sales of property and equipment (247 )   (16,399 )  
  Loss on disposal of property and equipment 28,824     116,490    
  Net gain on sales of other investments -     (2,708 )  
  Impairment of other investments 14,729     -    
  Loss on sales of stocks of an affiliate -     12,070    
  Foreign exchange loss (gain), net (27,609 )   18,429    
  Equity in net income of equity method investees, less dividends received 34,172     (60,547 )  
  Deferred income tax expense (59,126 )   (444,078 )  
  Other 368     7,049    
  Changes in operating assets and liabilities:        
  Increase in accounts receivable (3,551,160 )   (3,687,105 )  
  Decrease in net investment in sales-type lease — noncurrent 115,610     92,140    
  Decrease in inventories 728,773     786,260    
  Decrease (increase) in prepaid expenses 607,225     (405,326 )  
  Decrease (increase) in other current and noncurrent assets (188,304 )   1,216,437    
  Increase in accounts payable 1,925,649     667,465    
  Increase in income taxes payable 568,914     764,551    
  Decrease in accrued expenses (261,171 )   (186,236 )  
  Increase in deferred income—current 12,951     1,117,832    
  Increase in deferred income—noncurrent 377,286     302,112    
  Decrease in other current and noncurrent liabilities (308,707 )   (1,714,893 )  
  Net cash provided by operating activities 4,240,431     2,960,013    
  INVESTING ACTIVITIES:        
  Purchase of property and equipment (2,444,362 )   (2,683,903 )  
  Proceeds from sales of property and equipment 1,481,371     827,010    
  Purchase of other investments (102,381 )   (94,416 )  
  Investment in an equity method investee (298,192 )   -    
  Proceeds from sales of other investments 4,229     5,140    
  Payments of guarantee deposits (326,873 )   (33,243 )  
  Refund of guarantee deposits 12,527     4,298    
  Payments for refundable insurance policies (14,090 )   (14,091 )  
  Other (55,351 )   2,000    
  Net cash used in investing activities (1,743,122 )   (1,987,205 )  
    Three Months Ended   Three Months Ended   
    March 31, 2016   March 31, 2017  
    Thousands of JPY   Thousands of JPY  
  FINANCING ACTIVITIES:        
  Principal payments under capital leases (1,154,338 )   (1,284,643 )  
  Proceeds from other noncurrent liabilities -     1,498,306    
  Repayments of other noncurrent liabilities -     (30,122 )  
  Payments for purchase of treasury stock -     (522,607 )  
  Net cash used in financing activities (1,154,338 )   (339,066 )  
           
  EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (7,614 )   58,631    
           
  NET INCREASE IN CASH AND CASH EQUIVALENTS 1,335,357     692,373    
  CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 18,233,738     21,266,218    
  CASH AND CASH EQUIVALENTS, END OF THE PERIOD 19,569,095     21,958,591    
           

Note: The following information is provided to disclose Internet Initiative Japan Inc. ("IIJ") financial results (unaudited) for the fiscal year ended March 31, 2017 ("FY2016") in the form defined by the Tokyo Stock Exchange.

Consolidated Financial Results for the Fiscal Year Ended March 31, 2017 [Under accounting principles generally accepted in the United States ("U.S. GAAP")]

May 15, 2017

Company name: Internet Initiative Japan Inc.Exchange listed: Tokyo Stock Exchange First SectionStock code number: 3774URL: http://www.iij.ad.jp/ Representative: Eijiro Katsu, President and Representative DirectorContact: Akihisa Watai, Managing Director and CFOTEL: (03) 5205-6500Scheduled date for annual general shareholder's meeting: June 28, 2017Scheduled date for dividend payment: June 29, 2017Scheduled date for filing of annual report ( Yuka-shoken-houkokusho) to Japan's regulatory organization: June 30, 2017Supplemental material on annual results: YesPresentation on quarterly report: Yes (for institutional investors and analysts)

(Amounts of less than JPY one million are rounded)

1. Consolidated Financial Results for the Fiscal Year Ended March 31, 2017 (April 1, 2016 to March 31, 2017)
     
(1) Consolidated Results of Operations   (% shown is YoY change)
  Total revenues Operating income Income before income tax expense Net income attributable to IIJ
  JPY millions % JPY millions % JPY millions % JPY millions %
Fiscal year ended March 31, 2017 157,789 12.2 5,134 (16.4 ) 5,427 (12.4 ) 3,167 (21.6 )
Fiscal year ended March 31, 2016 140,648 14.3 6,140 21.0   6,193 20.5   4,038 21.6  
                       

(Note1) Total comprehensive income attributable to IIJ              Fiscal year ended March 31, 2017: JPY4,470 million (up 35.6% YoY)Fiscal year ended March 31, 2016: JPY3,296 million (down 7.1% YoY)(Note2) Income before income tax expense represents income from operations before income tax expense and equity in net income in equity method investees, respectively, in IIJ's consolidated financial statements.
           
  Basic net income attributable to IIJ per share Diluted net income attributable to IIJ per share Net income attributable to IIJ to total shareholders' equity Income before income tax expense to total assets Total revenuesoperating margin ratio
  JPY JPY % % %
Fiscal year ended March 31, 2017 69.36 69.18 4.8 4.3 3.3
Fiscal year ended March 31, 2016 87.88 87.71 6.3 5.5 4.4
           

(Reference) Equity in net income of equity method investeesFiscal year ended March 31, 2017: JPY130 millionFiscal year ended March 31, 2016: JPY180 million
       
(2) Consolidated Financial Position      
  Total assets Total equity Total IIJ shareholders' equity Total IIJ shareholders' equity to total assets Total IIJ shareholders' equity per share
  JPY millions JPY millions JPY millions %  
As of March 31, 2017 137,395 67,380 66,742 48.6 1,481.16
As of March 31, 2016 117,835 65,344 64,845 55.0 1,411.13

(3) Consolidated Cash Flow      
  Operating activities Investing activities Financing activities Cash and cash equivalents (end of the period)
  JPY millions JPY millions JPY millions JPY millions
Fiscal year ended March 31, 2017 7,368 (7,376 ) 2,492   21,959
Fiscal year ended March 31, 2016 12,052 (8,377 ) (5,201 ) 19,569
             

2. Dividends
  Dividend per Shares Total cash dividends for the year Payout Ratio(consolidated) Ratio of Dividends to Shareholder's Equity(consolidated)
1Q-end 2Q-end 3Q-end Year-end Total
  JPY JPY JPY JPY JPY JPY millions % %
Fiscal Year Ended March 31, 2016 - 11.00 - 11.00 22.00 1,011 25.0 1.6
Fiscal Year Ended March 31, 2017 - 13.50 - 13.50 27.00 1,229 38.9 1.9
Fiscal Year Ending March 31, 2018 (forecast) - 13.50 - 13.50 27.00   30.4  
                 

(Note) Change from the latest released dividend forecasts: No.

3. Target of Consolidated Financial Results for the Fiscal Year Ending March 31, 2018                                                                      

           
(April 1, 2017 through March 31, 2018)         (% shown is YoY change)
  Total Revenues Operating Income Income before Income Tax Expense (Benefit) Net Income attributable to IIJ Basic Net Income attributable to IIJ per Share
  JPY millions % JPY millions % JPY millions % JPY millions % JPY
Interim Period Ending September 30, 2017 82,400 11.2 2,000 2.7 2,000 (5.0 ) 1,100 (0.7 ) 24.41
Fiscal Year Ending March 31, 2018 176,000 11.5 6,500 26.6 6,500 19.8   4,000 26.3   88.77
                       

(Note1) Changes from the latest forecasts released: No

* Notes

  1. Changes in significant subsidiaries for the fiscal year ended March 31, 2017(Changes in significant subsidiaries for the fiscal year ended March 31, 2017 which resulted in changes in scope of consolidation): None
  2. Changes in significant accounting and reporting policies for the consolidated financial statements1) Changes due to the revision of accounting standards: No2) Others: No
  3. Number of shares outstanding (shares of common stock)1) The number of shares outstanding (inclusive of treasury stock):  As of March 31, 2017: 46,711,400 shares  As of March 31, 2016: 46,711,400 shares2) The number of treasury stock:  As of March 31, 2017: 1,650,909 shares  As of March 31, 2016: 758,709 shares3) The weighted average number of shares outstanding:  For the fiscal year ended March 31, 2017: 45,652,981 shares  For the fiscal year ended March 31, 2016: 45,950,098 shares

[English Translation]

May 15, 2017

Company name: Internet Initiative Japan Inc.

Company representative: Eijiro Katsu, President and Representative Director (Stock Code Number: 3774 The First Section of the Tokyo Stock Exchange)

Contact: Akihisa Watai, Managing Director and CFO TEL: 81-3-5205-6500

Information Pertaining to Our Largest Shareholder

1. About Our Largest Shareholder (As of March 31, 2017)
Name Relationship Its Ownership Percentage (%) Securities Exchanges where its Shares are Listed (*)
Direct  ownership Indirect ownership Total
Nippon Telegraph and Telephone Corporation("NTT") IIJ is NTT's affiliate company 22.4 4.5 26.9 Tokyo Stock Exchange (First Section)New York Stock Exchange
* NTT delisted its American Depositary Receipts from the New York Stock Exchange as of April 3, 2017, as announced.
 

2. Position of the Listed Company (IIJ) within NTT Group and other relationships

The ownership percentage by NTT, which is IIJ's largest shareholder, was 26.9% as of March 31, 2017, including its indirect ownership. However, IIJ's business activities are not affected by NTT's ownership in IIJ and IIJ is maintaining its management independence.

3. Business Relationship with NTT Group

IIJ uses services provided by Nippon Telegraph and Telephone East Corporation and Nippon Telegraph and Telephone West Corporation for a significant portion of IIJ's access circuits, services provided by NTT Communications Corporation for a significant portion of IIJ's domestic and international backbone circuits, and services provided by NTT DOCOMO, INC for a significant portion of IIJ's mobile infrastructure, to provide Internet connectivity and other services to IIJ's customers. IIJ also leases a part of Internet data center facilities from NTT Group companies to provide Internet data center services. The aggregate amount paid to for these services was JPY23,005 million for the fiscal year ended March 31, 2017.

4. Policy Concerning Measures to Protect Minority Shareholders in Transactions with NTT Group

Business transactions with the NTT Group are within the scope of normal business practices and there is no special contract made in relation to the investment by NTT Group.

Internet Initiative Japan Inc.E-mail: ir@iij.ad.jp Tel: +81-3-5205-6500URL: http://www.iij.ad.jp/en/irFor inquiries, contact:IIJ Investor RelationsTel: +81-3-5205-6500 E-mail: ir@iij.ad.jp URL: http://www.iij.ad.jp/en/ir

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