Internet Initiative Japan Inc. ("IIJ") (NASDAQ:IIJI) (TSE1:3774)
has revised its first half (“1H16”, from April 1, 2016 to September
30, 2016) and full-year (“FY2016”, from April 1, 2016 to March 31,
2017) financial targets for the fiscal year ending March 31, 2017
from the targets announced on May 13, 2016 based on the recent
financial performance.
The dividend targets remain unchanged from what
we announced on May 13, 2016: annual cash dividend JPY27.00 per
ordinary share. The distribution of the interim dividend was
resolved today by the IIJ’s Board of Directors as JPY13.50 per
ordinary share.1
1. Revision for the Consolidated Financial Targets for 1H16
(From April 1, 2016 to September 30, 2016)
|
TotalRevenues |
Operating Income |
Income before Income Tax Expense |
Net Income attributable to IIJ |
Basic Net Income attributable to IIJ per Share |
JPY millions |
JPY millions |
JPY millions |
JPY millions |
JPY |
Previous Target (A) |
|
73,800 |
|
|
2,800 |
|
|
2,800 |
|
|
1,900 |
|
41.35 |
New Target (B) |
|
74,123 |
|
|
1,948 |
|
|
2,105 |
|
|
1,108 |
|
24.11 |
Change (B-A) |
|
323 |
|
|
(852 |
) |
|
(695 |
) |
|
(792 |
) |
- |
Change (%) |
|
0.4 |
% |
|
(30.4 |
%) |
|
(24.8 |
%) |
|
(41.7 |
%) |
- |
< Reference >1H15 Results |
|
65,334 |
|
|
2,563 |
|
|
2,647 |
|
|
1,652 |
|
35.96 |
2. Revision for the Consolidated Financial Targets for FY2016
(From April 1, 2016 to March 31, 2017)
|
TotalRevenues |
Operating Income |
Income before Income Tax Expense |
Net Income attributable to IIJ |
Basic Net Income attributable to IIJ per Share |
JPY millions |
JPY millions |
JPY millions |
JPY millions |
JPY |
Previous Target (A) |
|
159,000 |
|
|
7,300 |
|
|
7,300 |
|
|
5,000 |
|
108.81 |
New Target (B) |
|
158,000 |
|
|
5,000 |
|
|
5,100 |
|
|
3,000 |
|
65.67 |
Change (B-A) |
|
(1,000 |
) |
|
(2,300 |
) |
|
(2,200 |
) |
|
(2,000 |
) |
- |
Change (%) |
|
(0.6 |
%) |
|
(31.5 |
%) |
|
(30.1 |
%) |
|
(40.0 |
%) |
- |
< Reference >FY2015 Results |
|
140,648 |
|
|
6,140 |
|
|
6,193 |
|
|
4,038 |
|
87.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Reason for Revision
A) Regarding 1H16 Financial Targets Revision
With regards to the overall 1H16 business
situation, while strong revenue growth is achieved as initially
expected (13.5% increase from 1H15), 1H16 operating income is
expected to be weaker than initially expected. It is because the
issues written below took place when the overall cost such as
personnel-related costs including outsourcing personnel as well as
depreciation related to the commencement of new services are
increasing with aggressive business investment.
1H16 total revenues are expected to slightly
exceed our initial expectation. 1H16 network services revenue is
expected to exceed our initial expectation as mobile-related
services continued to grow. 1H16 systems integration revenue is
expected to be slightly weaker than initially expected mainly
because of the cancellation for certain relatively large systems
operation and maintenance projects in 1Q16. ATM operation business
revenue is growing as initially expected.
1H16 operating income is expected to be
approximately JPY0.9 billion weaker than initially expected. This
is mainly due to the deterioration of systems integration gross
margin, resulting mainly from the followings:
- Low productivity of system engineers related to the projects
already recognized as revenue at the end of FY2015. (1Q16)
- A certain large scale construction project with low
profitability as its purchasing cost portion was significant.
(1Q16)
- Weaker than expected revenue growth of systems operation and
maintenance mainly due to the cancellation of certain large
projects. (from 1Q16)
- Delay in offering some functions of our foreign exchange system
ASP service resulted in a temporal negative income impact. (from
1Q16)
- Low productivity of system engineers due to greater involvement
in pre-sales phase with an increase in large-scale projects
including cloud related projects and postponement of several
projects triggered by customers own issues to which system
engineers had already been involved. (2Q16)
1H16 systems integration gross margin is
expected to decrease year over year as shown in the below summary
chart. On the other hand, network services gross margin is expected
to increase year over year.
1H16 income before tax income tax expense as
well as 1H16 net income attributable to IIJ are expected to be
weaker than initially expected as 1H16 operating income is expected
to be weak as mentioned above. 1H16 income tax before income tax
expense is expected to be larger than 1H16 operating income as
there would be net gain on sales of other investments, distribution
from fund investment and dividend income.
Summary for
1H16 Operating Results Outlook |
|
|
1H15 results (actual) |
1H16 results (outlook) |
YoY change |
|
JPY millions |
JPY millions |
% |
Total revenues |
65,334 |
74,123 |
|
13.5 |
|
Network services |
38,000 |
44,836 |
|
18.0 |
|
Systems integration (SI) |
23,725 |
25,768 |
|
8.6 |
|
Equipment sales |
1,638 |
1,467 |
|
(10.5 |
) |
ATM operation business |
1,971 |
2,052 |
|
4.2 |
|
Total costs |
53,626 |
62,275 |
|
16.1 |
|
Network services |
30,501 |
36,715 |
|
20.4 |
|
Systems integration (SI) |
20,341 |
22,993 |
|
13.0 |
|
Equipment sales |
1,480 |
1,343 |
|
(9.3 |
) |
ATM operation business |
1,304 |
1,224 |
|
(6.2 |
) |
Total gross margin |
11,708 |
11,848 |
|
1.2 |
|
Network services |
7,498 |
8,120 |
|
8.3 |
|
Systems integration (SI) |
3,385 |
2,775 |
|
(18.0 |
) |
Equipment sales |
158 |
124 |
|
(21.8 |
) |
ATM operation business |
667 |
829 |
|
24.4 |
|
SG&A expenses and R&D |
9,145 |
9,900 |
|
8.3 |
|
Operating income |
2,563 |
1,948 |
|
(24.0 |
) |
|
|
|
|
|
|
B) Regarding FY2016 Financial Targets Revision
With regards to the overall business situation
for FY2016, the low productivity of systems engineers is expected
to improve in 2H16 based on the current SI projects situation.
However, based on the current order accumulation situation, we
would miss the revenue targets of new services, launched later last
year, such as “IIJ GIO Infrastructure P2” and “IIJ Omnibus” which
should increase but not as strongly as our initial expectation.
Since the depreciation for these new services have already begun
from the latter half of last fiscal year, the revenue gap will
directly impact our operating income against our initial
expectation. Because Japanese companies are conservative with their
systems, especially with large, complex and mission-critical ones,
the lead time, including their internal discussion and preparation,
takes longer than expected. Also, some new services and functions
were not launched as scheduled. Another issue that would impact our
operating income against our initial expectation is the cost
related to mobile services. We increased leasing MVNO bandwidth
largely during 2Q16 along with increasing traffic trend in
order to strengthen our competitive advantage; therefore, this
recurring type cost for MVNO infrastructure would exceed our
initial expectation in 2H16. Although the excessive cost is not
expected to become larger in 2H16 and the gross margin amount of
mobile services is expected to increase year over year, it
would continue to impact our network services’ profitability
against initial expectation.
FY2016 total revenues are expected to be
JPY158.0 billion (12.3% increase from FY2015 total revenue). FY2016
network services revenue is expected to be in line with our initial
expectation: mobile-related services exceeding our initial
expectation, weaker than initially expected revenue growth of “IIJ
GIO Hosting Package Service” from 1H16 because of game customers’
decrease in revenue and/or cancellation, and weaker than initially
expected revenue growth in “IIJ Omnibus Services”. FY2016 systems
integration revenue is expected to be approximately JPY1.0 billion
short of our initial expectation because of the weaker than
expected revenue growth of systems operation and maintenance from
1H16 and the weaker than expected revenue growth of “IIJ GIO
Infrastructure P2”.
FY2016 operating income is expected to be JPY5.0
billion (18.6% decrease from FY2015 operating income), JPY2.3
billion weaker than our initial expectation, is mainly due to the
followings:
< Systems integration gross margin gap with
our initial expectation >
- Approximately JPY0.9 billion of gross margin gap in 1H16.
- Approximately JPY0.4 billion of gross margin gap due to slower
than expected revenue growth of “IIJ GIO Infrastructure P2” which
fixed-type costs have been increasing. It is slower than expected
mainly because projects scale becoming larger which require longer
lead-time and service function enhancement have been delayed in
some cases.
- Approximately JPY0.2 billion of gross margin gap due to weaker
than expected revenue growth of non-cloud systems operation and
maintenance.
< Network services gross margin gap with our
initial expectation >
- Approximately JPY0.4 billion of gross margin gap due to slower
than expected revenue growth of “IIJ Omnibus Service” which
fixed-type costs have been increasing. It is slower than expected
mainly because projects becoming more complex which require longer
lead-time and service function enhancement have been delayed in
some cases.
- Approximately JPY0.4 billion of gross margin gap due to an
increase in mobile-related costs.
We believe our targeted markets should
continuously expand with Japanese enterprises’ IT systems becoming
more advanced by adopting cloud services, usage of ICT becoming
more prevalent with BigData and IoT, greater demands for
security-related services and solutions to combat information
leakage and many other security incidents, explosion of network
traffic along with distribution of high-definition contents such as
4K over Internet, and expansion of MVNO market especially for
consumers and so on. In order to capture these market opportunities
and achieve sustainable growth, we have been engaging in service
and business developments as well as R&D activities as we
firmly believe these are indispensable for us to maintain our
competitive advantage of renowned expertise about Internet-related
technology. We launched “IIJ Omnibus Service” and “IIJ GIO
Infrastructure P2” in the latter half of last fiscal year. We have
also started to further focus on implementing full-MVNO, developing
new services and/or functions in the field of IoT, security and
contents distribution. As we strengthen our competitive advantage
by developing all these necessary components, we acquired local
government large-scale multiple-year project with its monthly
recurring revenue expected to become over JPY100 million in which
cloud, security, system and network are mostly outsourced. We
anticipate the same type of transactions to increase
It is obvious that cloud, IoT and mobile markets
are to expand in the middle-to-long term. Although our FY2016
income level is to be weak temporarily, we shall execute our
business expansion strategy accordingly with our middle term plan2.
We expect income to improve from FY2017 with improved productivity
of systems engineers from 2H16, revenue accumulation by new
services, and improved network utilization with mobile service
subscription accumulation. Although operating income level is
expected to be 1 or 1.5 years delayed from what we initially
expected at the beginning of this fiscal year, we believe strong
revenue would generate continuous operating margin improvement.
Therefore, dividend targets remain unchanged from what we announced
in May 2016 and we also decided and announced that we will execute
repurchase of our own shares3.
Regarding FY2016 revised operating income target
compared with FY2015 operating income result and FY2016 initial
operating income target, please visit IIJ's following IR website.
Page 6 of the document shows the comparison.
http://www.iij.ad.jp/en/ir/news/2016/pdf/FY16revision_E.pdf.
< Note 1 >The above 1H16 and FY2016
consolidated financial targets as well as the business outlook are
based on information available as well as reasonable assumption at
the time of this announcement. The actual results may differ from
the targets and the business outlook due to various factors. 1H16
financial consolidated financial results will be announced on
November 8, 2016.
< Note 2 >Regarding the basic net income
attributable to IIJ per share for the fiscal year ending March 31,
2017 disclosed in this document, it is calculated based on the
assumption that 950,000 shares of IIJ’s own shares to be
repurchased by us during the period disclosed in our disclosure
titled “Notice Regarding Repurchase of Own Shares of Internet
Initiative Japan Inc.” which was announced today, November 4,
2016.
< 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.
< IIJ Investor Relations >Tel:
+81-3-5205-6500 E-mail: ir@iij.ad.jp URL:
http://www.iij.ad.jp/en/ir
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.
1 For detail, please refer to our press release titled “IIJ
Announces the Distribution of Retained Earnings (Interim Dividend)”
which was announced today.
2 We disclosed in our earnings release for the fiscal year
ended March 31, 2016 which was announced on May 13, 2016 and filed
with 6-K. For detail, please find the release here
http://www.iij.ad.jp/en/ir/library/financial/pdf/IIJI4Q15E.pdf
3 Please refer to our press release “Notice Regarding
Repurchase of Own Shares of Internet Initiative Japan Inc.” issued
today for detail.
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