Securities registered or to be registered pursuant to Section 12(b)
of the Act:
Securities registered or to be registered pursuant to Section 12(g)
of the Act:
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
This annual report contains forward-looking statements about us
and our industry that are based on our current expectations, assumptions, estimates and projections. These forward-looking statements
are subject to various risks and uncertainties. These statements discuss future expectations, identify strategies, discuss market
trends, contain projections of results of our operations and our financial condition, and state other forward-looking information.
Known and unknown risks, uncertainties and other factors could cause our actual results to differ materially from those contained
in or suggested by any forward-looking statement. We cannot provide any assurance that our expectations, projections, anticipated
estimates or other information expressed in these forward-looking statements will turn out to be correct. We do not undertake any
obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Important risks and factors that could cause our actual results
to differ materially from our forward-looking statements are generally provided in Item 3.D. “Risk Factors” and elsewhere
in this annual report on Form 20-F and include, without limitation:
PART I
Item 1. Identity of Directors, Senior Management
and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected Financial Data
The following tables include selected historical financial data
as of and for each of the fiscal years ended March 31, 2012, 2013, 2014, 2015, and 2016. The data in the table is derived from
our audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”), and audited by Deloitte Touche Tohmatsu LLC, an independent registered public accounting
firm. You should read the selected consolidated financial data together with Item 5. “Operating and Financial Review and
Prospects” of this annual report on Form 20-F and our consolidated financial statements and the notes to our consolidated
financial statements beginning on page F-1.
|
|
As
of and for the fiscal year ended March 31,
|
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
|
(millions of yen, except per share
and ADS data)
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet connectivity services (enterprise)
|
|
¥
|
14,707
|
|
|
¥
|
16,027
|
|
|
¥
|
16,585
|
|
|
¥
|
16,350
|
|
|
¥
|
17,597
|
|
Internet connectivity services (consumer)
|
|
|
5,717
|
|
|
|
5,466
|
|
|
|
6,025
|
|
|
|
8,222
|
|
|
|
15,256
|
|
WAN services
|
|
|
25,667
|
|
|
|
25,168
|
|
|
|
25,006
|
|
|
|
24,326
|
|
|
|
25,177
|
|
Outsourcing services
|
|
|
17,319
|
|
|
|
18,571
|
|
|
|
19,670
|
|
|
|
20,108
|
|
|
|
21,266
|
|
Total
|
|
|
63,410
|
|
|
|
65,232
|
|
|
|
67,286
|
|
|
|
69,006
|
|
|
|
79,296
|
|
Systems integration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems construction
|
|
|
11,997
|
|
|
|
15,825
|
|
|
|
18,673
|
|
|
|
20,437
|
|
|
|
21,145
|
|
Systems operation and maintenance
|
|
|
19,472
|
|
|
|
21,380
|
|
|
|
23,796
|
|
|
|
27,800
|
|
|
|
33,043
|
|
Total
|
|
|
31,469
|
|
|
|
37,205
|
|
|
|
42,469
|
|
|
|
48,237
|
|
|
|
54,188
|
|
Equipment sales
|
|
|
1,112
|
|
|
|
1,491
|
|
|
|
1,690
|
|
|
|
2,167
|
|
|
|
3,275
|
|
ATM operation business
|
|
|
1,324
|
|
|
|
2,320
|
|
|
|
2,827
|
|
|
|
3,640
|
|
|
|
3,889
|
|
Total revenues
|
|
|
97,315
|
|
|
|
106,248
|
|
|
|
114,272
|
|
|
|
123,050
|
|
|
|
140,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of network services
|
|
|
49,985
|
|
|
|
50,692
|
|
|
|
53,046
|
|
|
|
54,932
|
|
|
|
64,239
|
|
Cost of systems integration
|
|
|
24,979
|
|
|
|
30,425
|
|
|
|
36,510
|
|
|
|
41,562
|
|
|
|
46,226
|
|
Cost of equipment sales
|
|
|
980
|
|
|
|
1,318
|
|
|
|
1,527
|
|
|
|
1,932
|
|
|
|
2,969
|
|
Cost of ATM operation business
|
|
|
1,382
|
|
|
|
1,959
|
|
|
|
2,123
|
|
|
|
2,552
|
|
|
|
2,559
|
|
Total costs
|
|
|
77,326
|
|
|
|
84,394
|
|
|
|
93,206
|
|
|
|
100,978
|
|
|
|
115,993
|
|
Sales and marketing
|
|
|
7,947
|
|
|
|
8,059
|
|
|
|
8,548
|
|
|
|
9,188
|
|
|
|
10,589
|
|
General and administrative
|
|
|
5,300
|
|
|
|
5,632
|
|
|
|
6,374
|
|
|
|
7,368
|
|
|
|
7,471
|
|
Research and development
|
|
|
389
|
|
|
|
410
|
|
|
|
421
|
|
|
|
441
|
|
|
|
455
|
|
Total costs and expenses
|
|
|
90,962
|
|
|
|
98,495
|
|
|
|
108,549
|
|
|
|
117,975
|
|
|
|
134,508
|
|
OPERATING INCOME
|
|
|
6,353
|
|
|
|
7,753
|
|
|
|
5,723
|
|
|
|
5,075
|
|
|
|
6,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
48
|
|
|
|
47
|
|
|
|
51
|
|
|
|
63
|
|
|
|
93
|
|
Interest income
|
|
|
35
|
|
|
|
26
|
|
|
|
27
|
|
|
|
23
|
|
|
|
28
|
|
Interest expense
|
|
|
(299
|
)
|
|
|
(287
|
)
|
|
|
(256
|
)
|
|
|
(238
|
)
|
|
|
(241
|
)
|
Other — net
|
|
|
(161
|
)
|
|
|
218
|
|
|
|
730
|
|
|
|
216
|
|
|
|
173
|
|
Other income (expenses) — net
|
|
|
(377
|
)
|
|
|
4
|
|
|
|
552
|
|
|
|
64
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES
|
|
|
5,976
|
|
|
|
7,757
|
|
|
|
6,275
|
|
|
|
5,139
|
|
|
|
6,193
|
|
INCOME TAX EXPENSE
|
|
|
2,525
|
|
|
|
2,608
|
|
|
|
1,795
|
|
|
|
1,897
|
|
|
|
2,183
|
|
EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES
|
|
|
124
|
|
|
|
168
|
|
|
|
204
|
|
|
|
155
|
|
|
|
180
|
|
NET INCOME
|
|
|
3,575
|
|
|
|
5,317
|
|
|
|
4,684
|
|
|
|
3,397
|
|
|
|
4,190
|
|
LESS: NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
|
|
|
66
|
|
|
|
(16
|
)
|
|
|
(242
|
)
|
|
|
(75
|
)
|
|
|
(152
|
)
|
NET INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC.
|
|
¥
|
3,641
|
|
|
¥
|
5,301
|
|
|
¥
|
4,442
|
|
|
¥
|
3,322
|
|
|
¥
|
4,038
|
|
|
|
As
of and for the fiscal year ended March 31,
|
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
|
(millions of yen, except per share
and ADS data)
|
|
|
|
|
|
|
|
|
|
|
|
Per Share and ADS Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income attributable to IIJ per common share
(1)
|
|
¥
|
89.82
|
|
|
¥
|
130.76
|
|
|
¥
|
100.26
|
|
|
¥
|
72.31
|
|
|
¥
|
87.88
|
|
Diluted net income attributable to IIJ per common share
(1)
|
|
|
89.78
|
|
|
|
130.65
|
|
|
|
100.14
|
|
|
|
72.20
|
|
|
|
87.71
|
|
Basic net income attributable to IIJ per ADS equivalent
|
|
|
44.91
|
|
|
|
65.38
|
|
|
|
50.13
|
|
|
|
36.16
|
|
|
|
43.94
|
|
Diluted net income attributable to IIJ per ADS equivalent
|
|
|
44.89
|
|
|
|
65.33
|
|
|
|
50.07
|
|
|
|
36.10
|
|
|
|
43.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese Yen
(1)
|
|
¥
|
16.25
|
|
|
¥
|
18.75
|
|
|
¥
|
22.00
|
|
|
¥
|
22.00
|
|
|
¥
|
22.00
|
|
U.S. Dollars
(1) (2)
|
|
$
|
0.20
|
|
|
$
|
0.22
|
|
|
$
|
0.21
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
Basic weighted average number of shares
(1)
|
|
|
40,536,800
|
|
|
|
40,536,800
|
|
|
|
44,306,680
|
|
|
|
45,942,291
|
|
|
|
45,950,098
|
|
Diluted weighted average number of shares
(1)
|
|
|
40,556,400
|
|
|
|
40,572,600
|
|
|
|
44,361,083
|
|
|
|
46,014,737
|
|
|
|
46,043,383
|
|
Basic weighted average number of ADS equivalents (thousands)
|
|
|
81,074
|
|
|
|
81,074
|
|
|
|
88,613
|
|
|
|
91,885
|
|
|
|
91,900
|
|
Diluted weighted average number of ADS equivalents (thousands)
|
|
|
81,113
|
|
|
|
81,145
|
|
|
|
88,722
|
|
|
|
92,029
|
|
|
|
92,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
¥
|
13,537
|
|
|
¥
|
12,259
|
|
|
¥
|
22,421
|
|
|
¥
|
21,094
|
|
|
¥
|
19,569
|
|
Total assets
|
|
|
73,493
|
|
|
|
82,111
|
|
|
|
103,867
|
|
|
|
108,705
|
|
|
|
117,835
|
|
Short-term borrowings
|
|
|
9,000
|
|
|
|
9,400
|
|
|
|
9,400
|
|
|
|
9,250
|
|
|
|
9,250
|
|
Long-term borrowings, including capital lease obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
4,007
|
|
|
|
4,515
|
|
|
|
4,733
|
|
|
|
3,522
|
|
|
|
3,954
|
|
Noncurrent portion
|
|
|
6,731
|
|
|
|
6,350
|
|
|
|
4,603
|
|
|
|
4,340
|
|
|
|
7,779
|
|
Common stock
|
|
|
16,834
|
|
|
|
16,834
|
|
|
|
25,497
|
|
|
|
25,500
|
|
|
|
25,509
|
|
Total IIJ shareholders’ equity
|
|
|
32,688
|
|
|
|
37,607
|
|
|
|
59,912
|
|
|
|
62,504
|
|
|
|
64,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, including capitalized leases
(3)
|
|
¥
|
10,917
|
|
|
¥
|
10,405
|
|
|
¥
|
12,560
|
|
|
¥
|
11,835
|
|
|
¥
|
14,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin ratio
(4)
|
|
|
6.5
|
%
|
|
|
7.3
|
%
|
|
|
5.0
|
%
|
|
|
4.1
|
%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
¥
|
11,659
|
|
|
¥
|
9,639
|
|
|
¥
|
8,787
|
|
|
¥
|
12,912
|
|
|
¥
|
12,052
|
|
Investing activities
|
|
|
(5,954
|
)
|
|
|
(5,946
|
)
|
|
|
(10,203
|
)
|
|
|
(8,073
|
)
|
|
|
(8,377
|
)
|
Financing activities
|
|
|
(5,464
|
)
|
|
|
(4,996
|
)
|
|
|
11,382
|
|
|
|
(6,283
|
)
|
|
|
(5,201
|
)
|
_________________
|
(1)
|
We conducted a 1 to 200 stock split
on common stock with an effective date of October 1, 2012. The figures for the fiscal
year ended March 31, 2012 are retroactively adjusted to reflect the stock split.
|
|
(2)
|
The dividends per share were translated
into U.S. dollars at the relevant record date.
|
|
(3)
|
Further information regarding capital
expenditures, including capitalized leases and a reconciliation to the most directly
comparable U.S. GAAP financial measure can be found in the following page.
|
|
(4)
|
Operating income as a percentage of
total revenues.
|
Reconciliations of the Disclosed
Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures
Capital expenditures
We define capital expenditures as purchases of property and equipment
plus acquisition of assets by entering into capital leases. We have included the information concerning capital expenditures because
our management monitors our capital expenditure budgets and believes that it is useful to investors to know the trends of our capital
expenditures and analyze and compare companies on the basis of such investments. Capital expenditures, as we have defined it, may
not be comparable to similarly titled measures used by other companies.
The following table summarizes the reconciliation of capital expenditures
to purchases of property and equipment and acquisition of assets by entering into capital leases as reported in our consolidated
statements of cash flows prepared and presented in accordance with U.S. GAAP.
|
|
For
the fiscal year ended March 31,
|
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
|
(millions of yen)
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of assets by entering into capital leases
|
|
¥
|
4,750
|
|
|
¥
|
4,816
|
|
|
¥
|
3,436
|
|
|
¥
|
3,678
|
|
|
¥
|
6,118
|
|
Purchases of property and equipment
|
|
|
6,167
|
|
|
|
5,589
|
|
|
|
9,124
|
|
|
|
8,157
|
|
|
|
8,694
|
|
Total capital expenditures
|
|
¥
|
10,917
|
|
|
¥
|
10,405
|
|
|
¥
|
12,560
|
|
|
¥
|
11,835
|
|
|
¥
|
14,812
|
|
Exchange Rates
Fluctuations in exchange rates between the Japanese yen and the
U.S. dollar will affect the U.S. dollar and other currency equivalent of the yen price of IIJ shares and the U.S. dollar amounts
received on conversion of any cash dividends, which in turn will affect the U.S. dollar price of IIJ ADSs. We have translated some
Japanese yen amounts presented in this annual report into U.S. dollars solely for your convenience. Unless otherwise noted, the
rate used for the translations was ¥112.42 per U.S. $1.00, 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 March 31, 2016.
Translations do not imply that the yen amounts actually represent, or have been or could be converted into, equivalent amounts
in U.S. dollars.
The following table presents the noon buying rates for Japanese
yen per U.S. $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York:
Fiscal year ended March 31,
(1)
|
|
High
|
|
Low
|
|
Average
(2)
|
|
Period-end
|
2012
|
|
¥
|
85.26
|
|
|
¥
|
75.72
|
|
|
¥
|
78.83
|
|
|
¥
|
82.41
|
|
2013
|
|
|
96.16
|
|
|
|
77.41
|
|
|
|
82.96
|
|
|
|
94.16
|
|
2014
|
|
|
105.25
|
|
|
|
92.96
|
|
|
|
100.46
|
|
|
|
102.98
|
|
2015
|
|
|
121.50
|
|
|
|
101.26
|
|
|
|
110.78
|
|
|
|
119.96
|
|
2016
|
|
|
125.58
|
|
|
|
111.30
|
|
|
|
120.13
|
|
|
|
112.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
¥
|
121.05
|
|
|
¥
|
116.38
|
|
|
¥
|
118.23
|
|
|
¥
|
121.05
|
|
February
|
|
|
121.06
|
|
|
|
111.36
|
|
|
|
114.62
|
|
|
|
112.90
|
|
March
|
|
|
113.94
|
|
|
|
111.30
|
|
|
|
112.93
|
|
|
|
112.42
|
|
April
|
|
|
112.06
|
|
|
|
106.90
|
|
|
|
109.55
|
|
|
|
106.90
|
|
May
|
|
|
110.75
|
|
|
|
106.34
|
|
|
|
108.85
|
|
|
|
110.75
|
|
June (through June 24, 2016)
|
|
|
109.55
|
|
|
|
102.26
|
|
|
|
105.99
|
|
|
|
102.26
|
|
_____________________
|
(1)
|
Exchange rate refers to the foreign
exchange rate as set forth in the H.10 statistical release and historical data of the
Board of Governors of the Federal Reserve System.
|
|
(2)
|
For fiscal years, calculated from
the average of the exchange rates on the last day of each month during the period. For
calendar year months, calculated based on the average of daily exchange rates.
|
The noon buying rate on June 24, 2016 was ¥102.26 per $1.00.
B.
|
|
Capitalization and Indebtedness
|
Not required.
C.
|
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
You should carefully consider the following information, together
with the other information contained in this annual report on Form 20-F, including our consolidated financial statements and the
related notes, before making an investment decision. Any risks described below could result in a material adverse effect on our
business, financial condition or results of operations.
We may not maintain our current level of revenues
and profits or achieve our expected revenues and profits in the future.
Our business is principally conducted in Japan and most of our
revenues are from customers operating in Japan. For the fiscal year ended March 31, 2016, approximately 96% of our total
revenues were from customers operating in Japan. If the Japanese economy deteriorates and that results in significantly lower levels
of network and systems related investment and expenditures, customers may respond to such conditions by prioritizing low prices
over quality, or we may experience severe price reduction pressure and/or cancellation of large accounts. Such conditions may also
make it difficult to maintain our current level of revenues and income, or achieve our expected revenues and income, or payout
our target dividends.
In addition to factors related to general economic conditions in
Japan, we may not be able to maintain our current level of revenues and income or achieve our expected levels of revenues and income.
In fact, we revised our disclosed financial targets downward for the fiscal years ended March 31, 2014 and 2015, due to several
factors unrelated to general economic conditions in Japan. Factors that may prevent us from maintaining our current level of revenues
and income or achieving our expected levels of revenues and income include but are not limited to the following:
|
·
|
a decrease or weaker than expected growth in our network services revenues which include Internet connectivity services for
enterprise, Internet connectivity services for consumers, Wide Area Network (“WAN”) services, and outsourcing services
if, for example, we fail to develop and offer competitive services and solutions in a timely manner, if our service line-ups become
obsolete, if we fail to keep up with rapidly changing market trends, especially for the consumer market, if service prices fall
dramatically due, for example, to tough competition regarding customer acquisition, especially for our mobile services for consumers
which are provided through direct sales, sales partnerships, and Mobile Virtual Network Enabler (“MVNE”) strategy,
or if we experience cancellations or usage reductions, especially in large accounts, due, for example, to corporate customers’
demand to cut costs or a decrease in customers’ needs for network usage for enterprise services,
|
|
·
|
a decrease or weaker than expected growth in our systems construction revenues and lower margins if, for example, we fail to
successfully differentiate our technical skills from those of our competitors, if corporate customers put off placing orders with
us, if we fail to hire adequate employees or acquire outsourcing resources to complete systems construction projects appropriately,
if we have serious troubles or problems in certain systems construction projects which may become unprofitable or incur losses,
especially for large-scale projects, if we pursue unprofitable construction projects in order to, for example, gain greater business
opportunities and to acquire systems operation and maintenance profit in the future, or if cloud computing services continue to
replace conventional hardware,
|
|
·
|
a decrease or weaker than expected growth in our systems operation and maintenance revenues and lower margins if, for example,
the number and the size of systems construction projects which contain continuous systems operation and maintenance decrease or
do not significantly increase, if our cloud computing services revenues do not grow as anticipated, or if we have serious troubles
or problems in the systems operation and maintenance projects which may become unprofitable or incur losses. Also, we may have
cancellations or reductions in current systems operation and maintenance revenues due, for example, to severe price reduction requirements,
especially for large-scale projects, customers’ intention to reduce or eliminate their systems,
|
|
·
|
an inability to achieve anticipated revenue and income growth for our cloud computing services, in which we have been continuously
investing in facilities such as some portion of our data centers, servers, storages, software and other equipment as well as service
developments if, for example, the cloud computing market in Japan does not expand as large as we expect or takes a longer time
to expand than we expect, if we fail to successfully differentiate our services from those of our increasing number of competitors,
including global players, if we have serious system troubles and interruptions with our cloud computing services that damage our
credibility or cause customers to question the reliability of our services, if market prices for the services fall dramatically,
if we experience cancellations of large contracts or reduction of usage, or if Japanese companies strongly maintain their current
systems and fail to adopt cloud computing services to the extent currently anticipated. We may decide to pursue building large-scale
data centers in the future which may require large investment. For more discussion on the risks related to our cloud computing
services, please refer to other parts of “Risk Factors” including “
our investment in our new business and
service developments may not produce the returns we expect or may affect our results of operations and financial condition adversely.
”
|
|
·
|
an inability to achieve anticipated revenue and income growth for our mobile business for both enterprise and consumer, in
which we have been expanding our service infrastructure by increasing the purchasing volume of mobile bandwidth mainly from NTT
DoCoMo Inc. (“NTT Docomo”), enhancing marketing activities including increasing related advertisement expenses, if,
for example, the Japanese inexpensive LTE Subscriber Identity Module (“SIM”) card market does not expand as we expect
or takes a longer time to expand than we expect, if we experience severe price competition, if we fail to maintain appropriate
relationships with our sales partners, if we face troubles in providing services which damage our credibility, if we fail to increase
our brand awareness, if we fail to successfully differentiate our services from those of increasing number of competitors, or if
we experience an unexpected level of wholesale telecommunication services charge changes by NTT Docomo. We may make rather large-scale
investments to enhance our mobile service lineups in the future. For more discussion on the risks related to our mobile business,
please refer to other parts of “Risk Factors” including “
our investment in our new business and service developments
may not produce the returns we expect or may affect our results of operations and financial condition adversely.
”
|
|
·
|
an inability to achieve anticipated revenue and income growth for our overseas business, in which we have been investing in
overseas subsidiaries, facilities and increasing staff, if, for example, we fail to offer competitive services and solutions, if
our domestic customers reduce their overseas business and/or refrain from operating overseas business, if we fail to develop a
customer base overseas, if we fail to attract and attain qualified personnel overseas, if we fail to provide our services as reliably
as we provide them in the domestic market, if we fail to successfully work with business partners in abroad, or if we fail to adequately
control overseas subsidiaries and comply with necessary regulations. We may expand our presence overseas by, for example, increasing
overseas subsidiaries or participating in more joint ventures with local companies. For more discussion on the risks related to
our overseas business, please refer to other parts of “Risk Factors” including “
our investment in our new
business and service developments may not produce the returns we expect or may affect our results of operations and financial condition
adversely.
”
|
|
·
|
a decline in the profitability of network services if, for example, we invest in and contract more network capacity, including
service facilities, than we actually require to serve our customers, if we experience an unexpected level of increase in prices
such as for electricity, leasing lines for our Internet backbone and interconnectivity bandwidth for Mobile Virtual Network Operator
(“MVNO”) infrastructure. These price increases could be due, for example, to an increase in Internet traffic volume
and general demand for the infrastructure. There may also be price increases for international leasing lines and network equipment
for service facilities, including cloud computing services, due, for example, to the weaker Japanese yen,
|
|
·
|
an unexpected level of increase in expenses and investments such as for research and development, back-office systems and other
similar expenses and investments which we may be forced to make in the future in order to remain competitive or support revenue
growth, and an unexpected level of increase in amortization and depreciation, loss on disposal, or loss due to obsolescence. We
may continuously reinforce our back-office operation by making necessary investments to support revenue growth,
|
|
·
|
an unexpected level of increase in personnel and outsourcing costs as well as related operating costs and expenses including
office rent expenses if, for example, we fail to manage personnel and outsourcing resources effectively, if we experience a shortage
of human resources in the market, or if we face pressure to raise individual salaries by a large amount due, for example, to Japanese
labor market situation. As for our overall personnel costs, they continuously increase year over year as we acquire new employees
in addition to the regular annual pay raise for existing employees. We may fail to raise enough revenue to cover these costs and
expenses increase.
|
|
·
|
an unexpected level of increase in selling, general and administrative expenses, such as personnel-related expenses, office
rent-related expenses, sales commission expenses, and advertising expenses,
|
|
·
|
the recording of an impairment loss on current and future intangible assets, which are recognized in relation to any mergers
and acquisitions, that are subject to amortization, such as customer relationships, and/or are not subject to amortization, such
as goodwill, as a result of an impairment test,
|
|
·
|
the recording of foreign exchange gain and/or loss such as for our U.S. dollars and British pounds denominated bank deposits,
other overseas assets and liabilities related to our overseas business,
|
|
·
|
the recording of impairment losses on available-for-sale securities, nonmarketable equity securities and funds,
|
|
·
|
the decline in the value and trading volume of our holding of available-for-sale securities from which we expect gains on sale,
|
|
·
|
a negative effect on our revenues and profits if our consolidated subsidiaries and/or equity method investees including newly
established ones cannot achieve our expected levels of revenues or manage costs and expenses in a timely and adequate manner,
|
|
·
|
a negative effect on our credibility, corporate image, or revenues and profits if we are unable to provide our services without
interruption to customers due, for example, to power supply shortage, and
|
|
·
|
a negative effect on our revenues and profits if new business areas to which we are to emphasize business investment such as
content distribution, Machine to Machine (“M2M”), Internet of Things (“IoT”), health care and further development
of overseas business, cannot achieve our expected level of revenues or manage costs and expenses in a timely and adequate manner.
|
We disclosed our middle term plan for the period from the fiscal year ending March 31, 2017 to the fiscal
year ending March 31, 2021 in our earnings results for the fiscal year ended March 31, 2016, which was filed as Form 6-K on May
13, 2016. The middle term plan was made based on our current expectation about, for example, the related markets and economic situations.
The plan, especially regarding our target for the fiscal year ending March 31, 2021, is not made by accumulating each revenue line
or operating cost item. We are not certain that we will be able to achieve our middle term plan due to such risks as weaker or
slower than expected market expansion or a failure to execute growth strategies effectively.
Please
see Item 5, “Operating and Financial Review and Prospects” for more detailed information concerning our operations
and other results.
We may not be able to compete effectively, especially
against competitors with greater financial, marketing and other resources.
The major competitors of our network services are major telecommunications
carriers such as NTT Communications Corporation (“NTT Communications”) and KDDI Corporation (“KDDI”). Price
competition for Internet connectivity services, outsourcing services, and WAN services has been severe. This competition may adversely
affect our revenues and profitability and may make it difficult for us to retain existing customers or attract new customers. The
major competitors of our systems integration business are systems integrators, such as NEC Corporation, Fujitsu Limited, NTT Data
Corporation and their affiliates. Our major competitors have the financial resources to reduce prices in an effort to gain market
share. There is strong competition among systems integrators that may adversely affect our revenues and profitability. Even though
the NTT Group, which is comprised of companies such as Nippon Telegraph and Telephone Corporation (“NTT”) and NTT Communications,
is IIJ's largest shareholder, we plan to continue to operate the Company separately and independently from the NTT Group, and will
therefore continue to compete with the NTT Group.
We anticipate that cloud computing services for enterprise should
become widely used in Japan in the middle- to long-term. In addition to the competitors listed above, global players such as Amazon.com,
Inc. and MICROSOFT CORPORATION have been aggressively expanding their business and may put additional business resources into the
cloud computing business which may lead to strong competition, including price competition, in Japan. If we fail to successfully
differentiate our services and solutions from these competitors, we may not be able to achieve expected future revenues and income,
or we may not recoup our investments in cloud computing services, which may adversely affect our financial condition and results
of operations.
As for our consumer business, especially our mobile services for
consumers, in which we offer inexpensive LTE SIM cards through an MVNO scheme, we may not be able to achieve expected future revenues
and income due, for example, to severe price competition and competition for customer acquisition, as a growing number of competitors
enter the market, a failure to differentiate our services from competitors, our limited brand recognition among consumers and a
lack of experience in providing services to consumers. We may increase our marketing expenses in order to improve our limited brand
recognition among consumers.
We are enhancing our indirect sales channels with partnership programs,
although currently our sales channels with respect to small and medium enterprises and the consumer market are not as strong as
those of our established and well recognized larger competitors.
Our competitors have advantages over us, including, but not limited
to:
·
|
|
substantially greater financial resources, more extensive and well-developed marketing
and sales networks,
|
·
|
|
a larger pool of technology human resources including application development engineers,
|
·
|
|
higher brand recognition among consumers and corporate customers,
|
·
|
|
larger customer bases, and
|
·
|
|
more diversified operations which allow profits from some operations to support operations
with lower profitability.
|
With these advantages, our competitors may be better able to:
·
|
|
sustain downward pricing pressure, including pressure on low-price Internet connectivity
services offered to corporate customers, which are our target customers,
|
·
|
|
develop, market and sell their services,
|
·
|
|
adapt quickly to new and changing technologies,
|
·
|
|
obtain new customers, and
|
·
|
|
aggressively pursue mergers and acquisitions to enlarge their customer base and market
share.
|
Our investment in our new business and service
developments may not produce the returns we expect or may affect our results of operations and financial condition adversely.
We have been investing in new business, service and solution developments
to further grow our business. Such investments include, for example, an increase in human resources and capital expenditures. As
for the number of our employees, we had 2,353, 2,835 and 2,980 employees as of March 31, 2014, 2015 and 2016, respectively. Capital
expenditures, including capitalized leases, and depreciation and amortization expenses for property and equipment are increasing
along with our business expansion efforts. Capital expenditures, including capitalized leases, for the fiscal years ended March
31, 2014, 2015 and 2016 were ¥12.6 billion, ¥11.8 billion and ¥14.8 billion, respectively. Depreciation and amortization
expenses for property and equipment for the fiscal years ended March 31, 2014, 2015 and 2016 were ¥8.4 billion, ¥9.3 billion
and ¥9.5 billion, respectively. If our investment returns are not realized in the future, our investments may become obsolete,
which may adversely affect our financial condition and results of operations. Our recent enhanced business investments could lead
to a greater uncertainty in our financial outlook.
We are investing heavily in our cloud computing services and infrastructure
as the cloud computing services market in Japan is anticipated to grow over the middle term. Revenues for our cloud computing services
for the fiscal years ended March 31, 2014, 2015 and 2016 were approximately ¥9.8 billion, ¥12.3 billion and ¥14.1 billion,
respectively. The capital expenditures, including capitalized leases, related to our domestic cloud computing services for the
fiscal years ended March 31, 2014, 2015 and 2016 were approximately ¥3.7 billion, ¥1.7 billion and ¥4.4 billion, respectively.
As we expand our cloud computing services capabilities in order to meet the increasing demand, we will need to acquire more servers,
network equipment and data center facilities, as well as human resources. We doubled the capacity of our container-based module
type data center in Matsue in November 2013 to meet demand. We anticipate that we can leverage our strong customer base and our
engineering skills
to further expand our cloud computing related services; however, if the
expansion of the cloud computing market does not proceed at its expected pace or takes longer than expected, if we face troubles
in providing cloud computing services which damage our credibility or lead customers to question the reliability of our services,
if we fail in our marketing strategy and fail to introduce cloud service line-ups that are superior to our competitors and promote
business enterprises’ cloud usage, if we invest more than customers demand, if severe price competition occurs, or if we
should need more human resources and incur unexpected additional costs, we may not be able to achieve the returns or benefits we
expect or we may need to increase the amount of our investments.
We have been providing mobile services from January 2008 by
purchasing NTT Docomo’s mobile network infrastructure as an MVNO. The total (sum of enterprise and consumer) mobile
services revenues were approximately ¥4.7 billion, ¥7.7 billion and ¥15.6 billion for the fiscal years ended
March 31, 2014, 2015 and 2016, respectively. The total number of our mobile services subscriptions was approximately 384
thousand, 673 thousand and 1,228 thousand as of March 31, 2014, 2015 and 2016, respectively. This increase is mainly due to
rapidly growing mobile services for consumers in which we offer inexpensive LTE SIM cards through our website, sales partners
and MVNE scheme. Currently, most Japanese mobile phone consumers are contracted with mobile network carriers such as NTT
Docomo, KDDI, and Softbank Corp. We anticipate that the inexpensive LTE SIM card market in Japan should expand in the
middle-to long-term because only a fraction of Japanese mobile phone users are contracted with inexpensive LTE SIM card
services. We may not be able to achieve our anticipated level of business growth if, for example, the market does not expand
as currently anticipated, if mobile carriers implement strategies in order to maintain their customer base by dramatically
lowering their pricing or offering comprehensive bundled services to make it harder for consumers to switch contracts to
other providers, if price competition becomes severe, if we fail to differentiate our services from our competitors, if
changes in regulation adversely affect our business, if we significantly damage our reputation or decrease customer trust
by failing to offer reliable connectivity or cause serious systems or network troubles or if we fail to maintain or develop
appropriate relationships with sales partners, if we face unfavorable changes in business conditions with these sales
partners, including sales commission terms, or if we mismanage our marketing expenses, we may not be able to achieve our
expected levels of business growth and could negatively impact our profit level. Because business enterprise has been our
main customer domain, IIJ is not well known among consumers. Therefore, we rely on our partnerships for sales channels,
including prominent consumer retailers who have nationwide stores in order to have face-to-face sales counters, as well as
MVNE strategy, through which we provide our MVNO infrastructure to corporate customers so that they can incorporate it into
their own services, in order to generate subscriptions. The cost structure of mobile services imposes uncertainty on our
financial outlook. Our mobile infrastructure purchasing volume from NTT Docomo has been increasing along with the growing
subscriptions of our mobile services for consumers. We pay NTT Docomo a wholesale telecommunication service charge, which is
a flat-rate charge per Mbps and the same charge is applied to all of NTT Docomo’s MVNOs. The charge is calculated
annually and it is mainly based on NTT Docomo’s mobile data communication infrastructure volume and its related costs,
in accordance with the law and the guidelines administrated by the Ministry of Internal Affairs and Communications
(“MIC”). For instance, the charge that was applied to our purchasing volume from NTT Docomo during the fiscal
year ended March 31, 2016 was based on NTT Docomo’s fiscal year ended March 31, 2015 mobile data communication
infrastructure volume and its related costs, and its charge was fixed and notified to NTT Docomo’s MVNOs including us
in March 2016. The charge has been applied to not only our purchasing volume during the fiscal year ended March 31, 2016, but
also during the fiscal year ended March 31, 2015. We need to apply its own estimated charge from the beginning of a fiscal
year until the charge is finalized. As the volume we purchase from NTT Docomo increases, the uncertainty regarding our
financial outlook, especially income, could also increase. We may make large-scale investments to enhance our mobile service
line-ups in the future. For more discussion on mobile services’ structure, please refer to Item 5.D “Trend
Information.”
We plan to increase our investment in the bank automated teller
machines (“ATM”) operation business by increasing the number of ATMs we place. If our ATM operation business does not
proceed as planned, we may lose all or part of our investment in this business which may adversely affect our financial condition
and results of operations. For more detailed risks pertaining to our ATM operation business, please refer to the risk described
in “Our investments in our subsidiaries and equity method investees may not produce the returns we expect or may affect our
results of operations and financial condition adversely.”
The Japanese domestic market opportunity is anticipated to be limited
over the long run mainly due to the declining Japanese population and along with that many Japanese companies heading overseas
to seek opportunities. Under such circumstances, we have been enhancing our overseas business developments mainly to expand our
customer base and to meet the range of Information Technology (“IT”) network needs of our Japanese customers operating
abroad since the fiscal year ended March 31, 2012. Revenues from our overseas business for the fiscal years ended March 31, 2014,
2015 and 2016 were approximately ¥4.1 billion, ¥4.9 billion and ¥5.3 billion, respectively. Although our overseas revenue
is still relatively small, if, for example, we fail to offer competitive services and solutions, if we fail to develop customer
base for our overseas business, if we fail to acquire enough qualified personnel, or if we invest and contract more network capacity
and service facilities than we actually need to serve our customers, due, for example, to our lack of experience in operating overseas
business, our limited brand recognition overseas, and change in our domestic customers’ overseas business expansion strategy
and refrain from operating overseas business, we may not be able to achieve our expected levels of revenues and profits. Overseas
business expansion may impact our domestic business if, for example, we assign many engineers for our overseas business that our
domestic business is left with insufficient resources to complete projects. Overseas business operating expenses and costs may
increase due, for example, to commencement of cloud computing services, opening of new overseas subsidiaries, increasing employees,
and investing in network facilities. Additionally, we may encounter difficulties in planning and managing operations due to unfavorable
political or economic factors, such as cultural and religious conflicts, non-compliance with expected business conduct, local regulations
and taxation laws, and a lack of adequate infrastructure. Moreover, changes in local regulations, policies, taxation laws, local
regulations, business or investment permit approval requirements, foreign exchange controls, or the nationalization of assets or
restrictions on the repatriation of returns from foreign investments in major markets and regions may affect our operating results.
Also, a failure to maintain adequate controls to comply with regulations such as the U.S. Foreign Corrupt Practices Act (“FCPA”)
may harm our reputation and adversely affect our financial results and business operation.
Other than the above, we will continue to invest in the development
of new businesses and services to enhance our current businesses and services. However, there is no assurance that we can achieve
the returns or benefits from the development of those businesses and services and this may adversely affect our financial condition
and results of operations.
Our investments in our subsidiaries and equity
method investees may not produce the returns we expect or may affect our results of operations and financial condition adversely.
In the past, we have invested in our group companies to expand
our businesses and generate new businesses. As of June 27, 2016, we have 15 consolidated subsidiaries and eight equity method investees.
The financial performance of our consolidated subsidiaries directly affects our financial condition and results of operations and
the financial performance of our equity method investees affects our financial condition and results of operations through our
pro rata interest in our equity method investments. There can be no assurance that we will be able to maintain or enhance the value
or the performance of such companies in which we have invested in or may invest in the future, or that we will achieve the returns
or benefits from these investments. We may consider further reorganization of our group companies and there is no guarantee that
we will be able to achieve the benefits that we expect from such reorganization. We may provide additional financial support in
the form of loans, additional equity investments, guarantees, or leases in such companies. We may lose all or part of our investment
relating to such companies if their value decreases as a result of their financial performance or if they go bankrupt. If our interests
differ from those of other investors in entities over which we do not exercise control, we may not be able to realize synergies
with the investees and it may adversely affect our financial condition and results of operations.
IIJ’s substantial investment in Crosswave Communications
Inc. (“Crosswave”), IIJ’s former equity method investee, became worthless due to Crosswave’s commencement
of corporate reorganization proceedings. In August 2003, Crosswave filed a voluntary petition for the commencement of corporate
reorganization proceedings in Japan, and as a result of IIJ’s equity method net loss and an impairment loss taken in respect
of IIJ’s investment in Crosswave, our net loss for the fiscal year ended March 31, 2003 was ¥15.6 billion, the highest
net loss that we have ever experienced.
IIJ Global Solutions Inc. (“IIJ-Global”), which became
our 100% owned consolidated subsidiary on September 1, 2010 after acquiring its stock from AT&T Japan LLC (“AT&T
Japan”) for ¥9.2 billion, mainly provides WAN services. For the fiscal years ended March 31, 2015 and 2016, IIJ-Global
had ¥25.2 billion and ¥26.2 billion in revenues, respectively, and ¥0.5 billion and ¥0.7 billion in operating income,
respectively. The operating income of IIJ-Global increased mainly because of continuous accumulation of orders from enterprise
customers. If IIJ-Global cannot achieve our expected levels of revenues and profits, manage costs and expenses in a timely and
adequate manner or incurs unexpected expenses, it may adversely affect our financial condition and results of operations. Intangible
assets as of March 31, 2016 related to IIJ-Global were ¥4.2 billion, and if IIJ-Global cannot achieve its future expected revenue
and profit, we may incur a substantial impairment loss on intangible assets which may adversely affect our financial condition
and results of operations. Related to the acquisition of IIJ-Global, IIJ-Global entered into a Solutions Engagement Agreement with
IBM Japan Ltd. (“IBM Japan”), IIJ-Global’s largest sales partner. This agreement, which establishes the basis
for a procurement relationship between IIJ-Global and IBM Japan, contains an indemnification for IIJ-Global to perform services,
functions, responsibilities and others actions in the same way as when the company was a part of AT&T Japan. Failure to perform
in this manner may adversely affect our financial condition and results of operations. Furthermore, IIJ-Global and the Company
may damage their relationship with IBM Japan, which may indirectly adversely affect our financial condition and results of operations.
Trust Networks Inc. (“Trust Networks”), IIJ's consolidated
subsidiary which was established in July 2007, is in charge of the ATM operation business. Trust Networks operates ATMs and the
related network systems and receives a commission for each bank withdrawal transaction when a customer uses its serviced ATMs.
As of March 31, 2016, 1,087 ATMs were placed in locations such as Japanese pinball shops (“pachinko parlors”). As of
March 31, 2016, IIJ has invested a total of ¥2.6 billion in Trust Networks (79.5% share ownership). For the fiscal years ended
March 31, 2015 and 2016, the ATM operation business had ¥3.6 billion and ¥3.9 billion in revenues, respectively, and ¥0.9
billion and ¥1.1 billion in operating income, respectively. If Trust Networks is not able to introduce ATMs in accordance with
its plan due, for example, to a longer than expected negotiation period with interested parties including banks, if it does not
record ATM withdrawal transactions as anticipated due, for example, to a decrease in the number of pinball players as a result
of a declining Japanese population or a decrease in consumer demand prompted by an increase in the Japanese consumption tax rate,
if it incurs unexpected additional costs, or if regulations change, it may not be able to achieve its future expected revenue and
profit, which may adversely affect our financial condition and results of operations. If the number of serviced ATMs increases,
our capital expenditures including capitalized leases may increase due to the leasing or purchasing of ATMs.
As of June 27, 2016, we have eight overseas subsidiaries including
IIJ America Inc. (“IIJ-America”) and IIJ Europe Limited (“IIJ-Europe”). In addition to the existing subsidiaries
in Singapore, Indonesia, Thailand, China and Hong Kong, we may establish more subsidiaries in Asia to seek greater business opportunities
as the need for IT is beginning to increase in the region compared to the United States and Europe, where IT-related markets are
already established. However, there is no assurance that we will be able to receive the returns we expect from investing due, for
example, to our lack of experience in operating businesses in emerging countries, a failure in offering services that meet local
needs, shrinking IT needs and change in the political and diplomatic situation. To enhance our overseas business, we have been
managing our overseas subsidiaries, for example, by injecting additional capital into them. In April 2012, we acquired the stocks
of Exlayer Global Inc., a holding company with five overseas subsidiaries in the systems integration industry for ¥0.3 billion
and made it our consolidated subsidiary, IIJ Exlayer Inc., which we absorbed in January 2014. We injected additional capital of
¥0.2 billion into IIJ-Europe, which was formerly known as IIJ Exlayer Europe Limited, for the fiscal year ended March 31, 2015.
Together with IIJ-Global, we injected a total of ¥0.1 billion capital into IIJ Global Solutions Indonesia and a
total of ¥0.2 billion into IIJ Global Solutions Singapore Pte. Ltd. (“IIJ-Global Singapore”) for the fiscal year
ended March 31, 2016. IIJ-Global alone injected additional capital of ¥0.4 billion and ¥0.1 billion into IIJ Global Solutions
China Inc. (“IIJ-Global China”) and IIJ Global Solutions (Thailand) Co., Ltd (“IIJ-Global Thailand”), respectively,
for the fiscal year ended March 31, 2016. We injected capital of ¥0.3 billion into PT Biznet Gio Nusantara for the fiscal year
ended March 31, 2015. We injected capital of ¥0.2 billion into Leap Solutions Asia Co., Ltd. for the fiscal year ended March
31, 2015. As of March 31, 2016, IIJ and IIJ-Global are lending ¥0.2 billion, ¥0.1 billion, ¥0.2 billion, and ¥0.1
billion to IIJ-Europe, IIJ-Global China, IIJ-Global Singapore and IIJ-Global Thailand, respectively. We may continue to inject
additional capital into and/or lend money to the existing and/or new affiliated companies.
If our systems integration revenues fluctuate
or if we fail to execute our systems construction projects in a timely or satisfactory manner, our results of operations and financial
condition may be adversely affected.
Systems construction revenues, a one-time revenue that is a part
of systems integration revenues, have a tendency to fluctuate from time to time compared to monthly recurring revenues of network
services and systems operation and maintenance due to the budget systems in Japan, of which many end in March. If corporate investments
decrease, or if we fail to meet customer demands due to a lack of a sufficient number of qualified engineers to execute the projects
in a professional manner, corporate customers may put off or stop placing orders with us and we may not be able to record systems
construction revenues and operating profit as expected. If we fail to execute the projects as contracted, our recognition of revenues
may be delayed or lost altogether, we could be held liable for damages or we could be sued, which could have an adverse impact
on our reputation, results of operations and financial condition.
Generally, gross margin of systems construction is low compared
to that of systems operation and maintenance, and gross margin for large scale systems construction projects may become even lower
due, for example, to price competition in acquiring such construction projects. It is more difficult to effectively control systems
construction projects as they become larger in scale, and we have seen an increase in the number of large scale systems construction
projects in recent years. Our results of operations and financial condition related to systems integration may be adversely affected
if, for example, we fail to control costs such as personnel and outsourcing costs or retain adequate personnel for projects, or
if we fail to calculate the necessary timeframe or the manpower to complete a project and the costs exceed the payments received
from our customers.
We may have an impairment loss as a result of
an impairment test on the intangible assets that are recorded related to mergers and acquisitions.
As of March 31, 2016, the total balance of our intangible assets
was approximately ¥9.7 billion, of which ¥6.3 billion was intangible assets not subject to amortization such as goodwill
and ¥3.4 billion was intangible assets subject to amortization such as customer relationships. Intangible assets in relation
to IIJ-Global and IIJ Technology Inc. (“IIJ-Tech”), former subsidiaries of IIJ, were ¥4.2 billion and ¥4.1
billion, respectively, as of March 31, 2016. The amount of our intangible assets may increase if we conduct mergers, acquisitions
or investments in affiliates in the future. We conduct impairment testing of goodwill and indefinite-lived intangible assets annually
on March 31 or more frequently if events or changes in circumstances indicate that an asset might be impaired. We conduct impairment
testing of definite-lived intangible assets whenever events or changes in circumstances indicate that the assets might be impaired.
If the business operations are adversely affected by factors such as significant adverse changes in their business climate and
others, we may have an impairment loss as a result of an impairment test on intangible assets. The recognition of any impairment
losses on intangible assets may result in material adverse effects on our financial condition and results of operations.
If we fail to attract and retain qualified personnel,
we may not be able to achieve our expected business growth.
Our network, services, products and technologies are complex, and
as a result, we depend heavily on the continued service of our engineering, research and development, and other personnel, and
as our business grows, we need to hire more of such employees. In particular, in order to continue to increase our revenues from
outsourcing services and systems integration, we require more sales and engineering personnel. We are not sure whether we will
be able to retain or attract such personnel and control human resources costs adequately. Competition for hiring qualified engineering,
research and development personnel is intense in the IT service industry in Japan, and there is a limited number of personnel with
the necessary knowledge and experience we require. None of our employees are bound by any employment or noncompetition agreements.
The realization of any or all of these risks may result in a failure to achieve our expected business growth.
Our business may be adversely affected if our
network suffers interruptions, errors or delays.
Interruptions, errors or delays with respect to our backbone network
or service facilities may be caused by human errors, interruptions, errors or delays with carriers’ service facility or natural
factors, many of which are beyond our control, including, but not limited to, damage from fire, earthquakes or other natural disasters,
power loss, sabotage, computer hackers, cyber-attack, human error, computer viruses and other similar events. Much of our computer,
networking equipment and the lines that make up our backbone network are concentrated in a few locations that are in earthquake-prone
areas. Any disruption, outages, delays or other difficulties experienced by any of our technological and information systems and
networks could result in a decrease in new or existing accounts, loss or exposure of confidential information, reduction in revenues
and profits, costly repairs or upgrades, reputational damage and decreased consumer and corporate customer trust in our business,
any or all of which could have a material adverse effect on our business, financial condition and results of operations.
Should we experience further unforeseeable incidents such as the
disruption of social infrastructure or power shortages and other impacts due to inoperable or damaged nuclear power plants, our
backbone network and service facilities could fail and, as a result, we may suffer direct and indirect damages, which may adversely
affect our financial conditions and results of operations.
If we fail to keep and manage our confidential
customer information, we could be subject to lawsuits, incur expenses associated with our security systems or suffer damage to
our reputation.
We keep and manage confidential information and trade secrets obtained
from our customers. We exercise much care in protecting the confidentiality of such obtained information and take steps to ensure
the security of our network, in accordance with the Personalized Information Protection Law protecting personal information that
came into effect in April 2005 and the requirements set by the MIC, and the Ministry of Economy, Trade and Industry. However, our
network, like all Information Technology systems, is vulnerable to external attack from computer viruses, hackers, cyber attack,
or other such sources. In addition, despite internal controls, misconduct by an employee could result in the improper use or disclosure
of confidential information. If any material leak of such information were to occur, we could be subject to lawsuits for damages
from our customers, incur expenses associated with repairing or upgrading our security systems and suffer damages to our reputation
that could result in a severe decline in new customers as well as an increase in service cancellations. As our consumer mobile
business grows, we are dealing with an increasing number of consumers. Our corporate image and credibility could be negatively
impacted, if, for example, we or our sales partners fail to comply with related laws such as consumer-protection laws, or if we
fail to securely protect our consumers’ individual information. Such failure could ultimately result in an adverse effect
on our business, financial condition and result of operations.
Business growth and a rapidly changing operating
environment may strain our limited resources.
We have limited operational, administrative and financial resources
which could be inadequate to sustain the growth we want to achieve. As the number of our customers and their Internet usage increases,
as traffic patterns change, as the volume of information transferred increases, and as the need for our cloud computing-related
service increases, we will need to increase expenditures for our network and other facilities, including data center facilities
in the future, in order to adapt our services and to maintain and improve the quality of our services. If we are unable to manage
our growth and expansion adequately, the quality of our services could deteriorate and our business may suffer. If data center
facilities do not meet our expectations, the quality of our service could deteriorate and our business may suffer. We may also
need to increase office rent expenditures along with our business expansion. If we are unable to prepare our network and other
facilities in a timely manner to meet our customers’ demand or our business expansion, we may miss growth opportunities or
may be obliged to bear higher costs to prepare our network and other facilities.
If we fail to keep up with the rapid technological
changes in our industry, our services may become obsolete and we may lose customers.
Our markets are characterized by but not limited to:
|
·
|
rapid technological changes, including the shift to new technology-based networks such as IPv6, cloud computing, Software Defined
Network (“SDN”) and Network Functions Virtualization (“NFV”),
|
|
·
|
frequent new product and service introductions,
|
|
·
|
continually changing customer requirements, and
|
|
·
|
evolving industry standards.
|
If we fail to obtain access to new or important technologies or
to develop and introduce new services and enhancements that are compatible with changing industry technologies and standards and
customer requirements, we may lose customers.
Our pursuit of necessary technological advances may require substantial
time and expense. Many of our competitors have greater financial and other resources than we do and, therefore, may be better able
to meet the time and expense demands of achieving technological advances. Additionally, this may allow our competitors to respond
more quickly to new and emerging technologies and standards or invest more heavily in upgrading or replacing equipment to take
advantage of new technologies and standards.
We depend on our executive officers, and if we
lose the service of our executive officers, our business and our relationships with our customers, major shareholders of IIJ and
other IIJ Group companies and our employees could suffer.
Our future success depends on the continued service of our executive
officers, particularly Mr. Koichi Suzuki, who is a founder, Chairman, Chief Executive Officer and representative director of IIJ
as well as some of IIJ’s major subsidiaries, and Mr. Eijiro Katsu, who is President, Chief Operating Officer and representative
director. We rely in particular on their expertise in the operation of our businesses and on their relationships with the shareholders
of IIJ, our customers, our business partners and our employees. None of our executive officers, including Mr. Suzuki and Mr. Katsu,
are bound by an employment or noncompetition agreement.
We may continuously pursue mergers and acquisitions
transactions which may not be effective.
We recognize that it is important for us to have more business
resources such as, but not limited to, human resources, customer base, application layer technology and others, in the middle term.
We may continuously pursue mergers and acquisitions transactions to scale up our business. The mergers and acquisitions transactions
may not always be on good terms and conditions, or bear the results we expect, or have synergistic effect, and we may incur a large
loss of goodwill. We may also exhaust time and our resources through mergers and acquisitions.
As a result, those transactions may strain our financial resources
and may adversely affect our financial conditions and results of operations or we will not be able to have enough business resources
to scale up due to a failure to engage in adequate mergers and acquisitions transactions.
Fluctuations in the stock prices of companies
or losses on companies in which we have invested may adversely affect our financial condition.
We have invested in non-affiliated companies in order to further
expand our business relationships with those companies. We have also invested in available-for-sale equity securities and in funds
which invest mainly in unlisted stocks. While we recorded no impairment losses on available-for-sale equity securities for the
fiscal year ended March 31, 2016, we may record an impairment loss in the future. The carrying amount of available-for-sale securities
was ¥3.9 billion, nonmarketable equity securities was ¥1.9 billion, which includes ¥0.9 billion of investments in funds
through a trust, and investments in funds was ¥1.0 billion as of March 31, 2016. We may invest in additional securities of
non-affiliated companies or additional funds. However, these securities or funds can be impaired significantly due to changes in
the financial condition of non-affiliated companies, general economic conditions in Japan or fluctuations in the Japanese stock
markets. Fluctuations in the fair value of these securities or funds in which we have invested may affect our financial results.
In addition, should we choose to sell all or a portion of these securities or funds, it is not certain that we will be able to
do so on favorable terms.
NTT, IIJ's largest shareholder, could exercise
substantial influence over us in a manner which may not necessarily be in our interest or that of our other shareholders.
NTT and its affiliates owned 26.4% of IIJ's outstanding voting
shares as of March 31, 2016. As IIJ's largest shareholder, NTT may be able to exercise substantial influence over us. As of June
27, 2016, IIJ has no outside director from NTT among IIJ's 14 directors. While we intend to conduct our day-to-day operations independently
from NTT and its affiliate companies and believe that NTT also plans for us to operate independently, NTT may decide to exercise
substantial influence over us in a manner which could impair our ability to operate independently. Furthermore, NTT may take actions
that are in its best interest, which may not be in our interest or that of our other shareholders.
We rely greatly on other telecommunications carriers
and other suppliers, and could be affected by disruptions in service or delays in the delivery of their products and services.
We rely on telecommunications carriers such as NTT Communications
and KDDI
for a significant portion of our network backbone, Nippon Telegraph and Telephone East Corporation (“NTT East”), Nippon
Telegraph Telephone West Corporation (“NTT West”) and KDDI for local access lines for our customers and NTT Docomo
and KDDI for mobile connectivity as an MVNO. We procure significant portions of our network backbone and data center facilities
pursuant to operating lease agreements with NTT Group, our largest provider of network infrastructure. For the fiscal year ended
March 31, 2016, we have spent ¥23.0 billion in the aggregate for international and domestic backbone, local access lines, mobile
connectivity and lines for WAN services to NTT Group. As of March 31, 2016, we had ¥1.8 billion of lease obligations with NTT
FINANCE CORPORATION (“NTT FINANCE”). We are subject to potential disruptions in these telecommunications services and,
in the event of such disruption, we may have no means of replacing these services, on a timely basis or at all.
We also depend on third-party suppliers of hardware components
such as routers, servers and software that are used in our network. We purchase certain components from limited sources, typically
from Cisco Systems, Inc. (“Cisco”), Juniper Networks, Inc. (“Juniper”), Hewlett-Packard Company, IBM Japan,
NEC, Fujitsu and VMware Inc. A failure by one of our suppliers to deliver quality products on a timely basis, or the inability
to develop alternative sources if and as required, may delay our ability to expand the capacity and scope of our network.
Any problems experienced by our telecommunications carriers and
other suppliers could have a material adverse effect on our business, financial condition and results of operations.
Regulatory matters and new legislation could
impact our ability to conduct our business.
The licensing, construction and operation of telecommunications
systems and services in Japan are subject to regulation and supervision by the MIC. We operate pursuant to licenses and approvals
that have been granted by the MIC.
Our licenses have an unlimited duration, but are subject to revocation
by the MIC if we violate any telecommunications laws and regulations in a manner that is deemed to harm the public interest, if
we or any of our directors are sentenced to a fine or any more severe penalty under the telecommunications laws, if we employ a
director who was previously sentenced to a fine or more severe penalty thereunder or if we have had a license revoked in the past.
Existing and future governmental regulation may substantially affect
the way in which we conduct our business. These regulations may increase the cost of doing business or may restrict the way in
which we offer products and services. We cannot predict future regulatory changes which may affect our business. Any changes in
laws, such as those described above, or regulations or MIC policy affecting our business activities and those of our competitors
could adversely affect our financial condition or results of operations. For more information, see Item 4. “Business Overview
— Regulation of the Telecommunications Industry in Japan.”
We may be named as defendants in litigation,
which could have an adverse impact on our business, financial condition and results of operations.
We are involved in normal claims and other legal proceedings in
the ordinary course of our business. We believe that there are no cases currently pending which would have a significant financial
impact on us, but we cannot be certain that we will not be named as a defendant in a future lawsuit. Any judgment against us in
such a lawsuit, or in any future legal proceeding, could have an adverse effect on our business, financial condition and results
of operations.
In the event that we need to raise capital, we
may issue additional shares of IIJ's common stock or securities convertible into IIJ's common stock, which may cause shareholders
to incur substantial dilution.
IIJ issued 4,700,000 new shares of common stock by way of a public
offering in July 2013 and 700,000 new shares by way of a third-party allotment in connection with a secondary offering of shares
by way of an over-allotment in August 2013. With this equity finance and the current stable cash flow, in our opinion, our working
capital is sufficient for our present requirements. For future strategic M&A transactions and/or large scale business investments,
we may choose to raise additional funds from the issuance of equity shares of IIJ’s common stock or securities convertible
into IIJ’s common stock, in which case existing shareholders may incur substantial dilution.
Prior to the above public offering, IIJ issued 2,500,000 new shares
of IIJ's common stock along with IIJ's listing on the Mothers market of the Tokyo Stock Exchange in December 2005. On May 11, 2007,
IIJ issued 435,600 shares of common stock to make IIJ's two consolidated subsidiaries wholly-owned through share exchanges. The
above figures are retroactively adjusted to reflect the 1:5 stock split in October 2005 and the 1:200 stock split in October 2012.
Item 4. Information on the Company
|
A.
|
History and Development of the Company
|
IIJ is incorporated under the Corporation Law of Japan as a joint
stock corporation under the name Internet Initiative Japan Inc. IIJ was incorporated in December 1992 and operates under the laws
of Japan.
IIJ began its operations in July 1993 as one of the first commercial
Internet service providers (“ISP”) in Japan to offer Internet connectivity services for both enterprises and consumers.
With the emergence of many other commercial ISPs, price competition for Internet connectivity services became severe. Rather than
falling into price competition, we strategically shifted our business model towards providing value-added total network solutions
to enterprise businesses that tend to choose quality and reliability over price, by fully leveraging our engineering skills to
differentiate ourselves from our competitors. Currently, our main business focuses on providing Internet connectivity services,
WAN services, outsourcing services, systems integration and equipment sales as total network solutions to mainly Japanese corporate
clients and governmental organizations. The Group works closely together as a group in providing total network solutions directly
to its customers. With our expertise in Internet related technology, our revenues have been expanding along with our customers’
needs for broader bandwidth for Internet connectivity services and for professional IT support for their network systems.
For descriptions and the history of the Group, see “Our Group
Companies” in Item 4.B.
IIJ became a public company in August 1999 with IIJ's initial public
offering of ADSs on the NASDAQ National Market. On December 2, 2005, IIJ listed on the Mothers market of the Tokyo Stock Exchange
(“TSE”). On December 14, 2006, IIJ moved to the First Section of the TSE for IIJ's listing in Japan. On October 1,
2012, IIJ conducted a 1 to 200 split of IIJ's shares of common stock and the total number of IIJ's issued shares of common stock
increased to 41,295,600. IIJ issued 4,700,000 new shares of IIJ’s common stock by way of a public offering in July 2013 and
700,000 new shares by way of a third-party allotment in connection with a secondary offering of shares by way of an over-allotment
in August 2013.
As for major business combinations, on May 11, 2007, IIJ made IIJ-Tech
and Net Care, Inc. (“Netcare”) our 100% owned consolidated subsidiaries through share exchanges. Netcare renamed itself
to IIJ Engineering Inc. (“IIJ-EG”) in October 2014. We absorbed IIJ-Tech on April 1, 2010. On September 1, 2010, IIJ
made IIJ-Global its 100% owned consolidated subsidiary by acquiring the stock of IIJ-Global from AT&T Japan for ¥9.2 billion
by our own cash and bank borrowings.
Please also see Note 2 “Business Combinations” to our
consolidated financial statements included in this annual report on Form-20F.
IIJ's head office is located at Iidabashi Grand Bloom, 2-10-2 Fujimi,
Chiyoda-ku, Tokyo 102-0071, Japan, and IIJ's telephone number at that location is +81-3-5205-6500. IIJ's agent in the United States
is IIJ-America, located at 55 East 59th Street, Suite 18C New York, NY 10022 and the telephone number at that location is (212)
440-8080. IIJ has a web site that you may access at http://www.iij.ad.jp/en/. Information contained on IIJ's web site does not
constitute part of this annual report on Form 20-F.
For a discussion of capital expenditures and divestitures currently
in progress and those for the past three years, see “Capital Expenditures” in Item 4.B.
The Group offers a comprehensive range of Internet connectivity
services, WAN services, outsourcing services, systems integration and equipment sales to our customers mainly in Japan. We believe
we provide efficient and reliable services and solutions to our customers on one of the most reliable Internet backbone networks
available in Japan. Our services are based upon high-quality Internet related networking technology tailored to meet specific needs
and demands of our customers.
Our Internet connectivity services include full-spec IP services
with bandwidth ranging from 64 kbps up to over 10 Gbps, low-cost broadband services such as optical and/or ADSL lines which are
mainly used to connect branch offices, and mobile data communications services for enterprise and consumers. Our WAN services provide
closed-network services, mainly operated by IIJ-Global. Our outsourcing services include security-related outsourcing services
that protect our customer network systems from unauthorized access and secure remote connections to internal networks, network-related
outsourcing services such as router rental and Virtual Private Network (“VPN”), server-related outsourcing services
such as web server hosting and e-mail security service, data center-related outsourcing services and our cloud computing service
IIJ GIO/Hosting Package. Our systems integration includes systems construction and systems operation and maintenance. Systems construction
is tailored to meet each of our customers’ requirements, which include consulting, project planning, systems design and development
of network systems, and sales of equipment and software purchased from third parties. Systems operation and maintenance revenues
include system related maintenance, monitoring and other operating services and cloud computing services such as IIJ GIO/Component.
We aim to be the leading supplier of total network solutions in Japan.
We started to provide our mobile access services for enterprise
as an MVNO in January 2008. From February 2012, we also started to offer our mobile services to consumers which became popular
in recent years because of their cost-effectiveness; accordingly, mobile services for consumers are one of our strong growth drivers.
From December 2009, we began proving our cloud computing services
under the service name “IIJ GIO.” We invest in infrastructures, such as servers, network equipment, virtualization
software and data center facilities for IIJ GIO and provide them to users as an Infrastructure as a Service (“IaaS”)
platform service basically for a monthly fee. IIJ GIO consists mainly of two types, (1) IIJ GIO/Hosting Package and (2) IIJ GIO/Component.
IIJ GIO/Hosting Package is a line-up of services for an all-in-one non-customizable packaged cloud computing service and IIJ GIO/Component
is a line-up of services for a semi-customizable cloud computing service. The cloud computing service in Japan is still in its
start-up phase and it is anticipated that the market in Japan should grow in the middle term. In November 2015, we launched a new
service platform “IIJ GIO Infrastructure P2” for our cloud services. The service provides reliable public cloud infrastructure
with increased processing performance as well as private cloud infrastructure.
We have eight overseas subsidiaries in the United States, the United
Kingdom, Germany, China, Singapore, Hong Kong, Thailand and Indonesia as of June 27, 2016. We have been enhancing our overseas
business primarily to fulfill the broad range of IT network related needs of our Japanese customers who are headed abroad to expand
their overseas business. As of June 27, 2016 we provide cloud computing services in the United States, the United Kingdom, China,
Singapore, Indonesia, and Thailand.
In addition, we conduct the ATM operation business through our consolidated
subsidiary, Trust Networks, which was established in July 2007. Trust Networks operates ATMs and ATM network systems and receives
a commission for each bank withdrawal transaction when a customer uses its serviced ATMs. As of March 31, 2016, 1,087 ATMs were
in operation.
Currently, we have two business segments: a network services and
systems integration business segment and an ATM operation business segment. Our network services and systems integration business
segment is comprised of Internet connectivity services for enterprise and consumers, WAN services, outsourcing services, systems
integration and equipment sales.
|
|
For
the fiscal year ended March 31,
(millions of yen, except for percentage data)
|
|
|
2014
|
|
2015
|
|
2016
|
Internet connectivity services
|
|
¥
|
22,610
|
|
|
|
19.8
|
%
|
|
¥
|
24,572
|
|
|
|
20.0
|
%
|
|
¥
|
32,853
|
|
|
|
23.4
|
%
|
WAN services
|
|
|
25,006
|
|
|
|
21.9
|
|
|
|
24,326
|
|
|
|
19.8
|
|
|
|
25,177
|
|
|
|
17.9
|
|
Outsourcing services
|
|
|
19,670
|
|
|
|
17.2
|
|
|
|
20,108
|
|
|
|
16.3
|
|
|
|
21,266
|
|
|
|
15.1
|
|
Systems construction
|
|
|
18,673
|
|
|
|
16.3
|
|
|
|
20,437
|
|
|
|
16.6
|
|
|
|
21,145
|
|
|
|
15.0
|
|
Systems operation and maintenance
|
|
|
23,796
|
|
|
|
20.8
|
|
|
|
27,800
|
|
|
|
22.6
|
|
|
|
33,043
|
|
|
|
23.5
|
|
Equipment sales
|
|
|
1,690
|
|
|
|
1.5
|
|
|
|
2,167
|
|
|
|
1.8
|
|
|
|
3,275
|
|
|
|
2.3
|
|
ATM operation business
|
|
|
2,827
|
|
|
|
2.5
|
|
|
|
3,640
|
|
|
|
2.9
|
|
|
|
3,889
|
|
|
|
2.8
|
|
Total revenues:
|
|
¥
|
114,272
|
|
|
|
100.0
|
%
|
|
¥
|
123,050
|
|
|
|
100.0
|
%
|
|
¥
|
140,648
|
|
|
|
100.0
|
%
|
The table below provides a breakdown of the total revenues and percentage
by service over the past three fiscal years. Most of our revenues are generated in Japan and are denominated in Japanese yen.
Internet Connectivity Services
We offer two categories of Internet connectivity services: Internet
connectivity services for enterprise and Internet connectivity services for consumers. Internet connectivity services for enterprise
are based on dedicated local-line connections and high-speed wireless data connections provided by telecommunications carriers
between our backbone and customers. Internet connectivity services for consumers mainly require customers to connect to our points
of presence (“POPs”) through the publicly-switched telephone network or a variety of broadband access services, such
as ADSL and optical lines as well as wireless mobile data communications. High-speed, high-capacity last-one mile access such as
dedicated access, ADSL, fiber optic, Ethernet, 3G mobile, LTE mobile and others are provided by large telecommunications carriers
such as NTT East, NTT West, NTT Docomo and others. A variety of choices for last-one mile access are provided to our customers
independently or together with other network solution line-ups to fulfill their specific and individual needs for tailored total
network solutions. The following table shows the number of our Internet connectivity service contracts as of the dates indicated:
|
|
As
of March 31,
|
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
Internet connectivity services (enterprise):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IP Service (-99 Mbps)
|
|
923
|
|
|
905
|
|
|
847
|
|
|
763
|
|
|
690
|
|
IP Service (100 Mbps – 999 Mbps)
|
|
344
|
|
|
401
|
|
|
448
|
|
|
504
|
|
|
532
|
|
IP Service (1 Gbps –)
|
|
132
|
|
|
207
|
|
|
271
|
|
|
340
|
|
|
367
|
|
IIJ Data Center Connectivity Service
|
|
323
|
|
|
306
|
|
|
288
|
|
|
278
|
|
|
270
|
|
IIJ FiberAccess/F and IIJ DSL/F (broadband services)
|
|
44,510
|
|
|
48,940
|
|
|
56,384
|
|
|
62,926
|
|
|
75,932
|
|
IIJ Mobile Service
|
|
46,532
|
|
|
74,366
|
|
|
127,057
|
|
|
187,429
|
|
|
431,030
|
|
IIJ Mobile Platform Service
|
|
0
|
|
|
9,903
|
|
|
32,253
|
|
|
67,434
|
|
|
250,757
|
|
Others
|
|
1,246
|
|
|
1,338
|
|
|
1,293
|
|
|
1,309
|
|
|
1,246
|
|
Total Internet connectivity service (enterprise) subscriptions
|
|
94,010
|
|
|
126,463
|
|
|
186,588
|
|
|
253,549
|
|
|
510,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet connectivity services (consumer):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IIJ
|
|
243,087
|
|
|
328,558
|
|
|
626,577
|
|
|
891,519
|
|
|
1,230,600
|
|
hi-ho
|
|
154,032
|
|
|
149,497
|
|
|
158,233
|
|
|
157,208
|
|
|
146,305
|
|
Total Internet connectivity service (consumer) subscriptions
|
|
397,119
|
|
|
478,055
|
|
|
784,810
|
|
|
1,048,727
|
|
|
1,376,905
|
|
_____________________
*1. Numbers in the table show
number of contracts except for “IIJ Mobile service,” “IIJ” and “hi-ho” which show number of
subscriptions.
*2. From Form 20-F for the
fiscal year ended March 31, 2016, the following changes are made to the table:
|
(1)
|
Number
of subscriptions related to “IIJ Mobile MVNO platform services” is now classified
under “IIJ Mobile service” in Internet connectivity services (enterprise).
They were formerly classified under “OEM” in Internet connectivity services
(consumer).
|
|
(2)
|
A
counting unit of mobile related services has been changed from number of contracts to
number of subscriptions.
|
|
(3)
|
Under
Internet connectivity services (consumer), what were formerly known as “Under IIJ
brand” and “OEM” are now merged under a newly created category “IIJ.”
|
(4)
Number of subscriptions for prepaid SIM cards are added to “IIJ” in Internet connectivity services (consumer).
Internet Connectivity Services
for Enterprise
Our lineup of Internet connectivity services for enterprise includes:
IP service, IIJ data center connectivity service, IIJ FiberAccess/F and IIJ DSL/F (broadband services), dial-up services and IIJ
mobile service.
IP Service and IIJ Data Center Connectivity Service.
Our IP service and data center connectivity service are full-scale, high-speed internet access services that connect the
customer’s network to our backbone with dedicated access lines. The services are used mainly for corporate headquarters
or data centers, where reliable network service is indispensable. The customer chooses the level of service it needs based upon
its bandwidth requirements. We currently offer service at speeds ranging from 64 kbps to over 10 Gbps. Subscribers pay a monthly
fee for the leased local access line from the customer’s location to one of our POPs. The amount of this fee varies depending
on the carrier, the distance between the customer’s site and our POPs and its contracted bandwidth. We collect the local
access fee from the customer and pay the amount to the carrier. While we prepare and arrange the leased access lines on behalf
of customers under our name, the usage fee collected from the customer and paid to the carriers is recorded gross in our consolidated
financial statements. For our IP service, we offer Service Level Agreements (“SLA”) to our customers to better define
the quality of services our customers receive. We were the first ISP in Japan to introduce this type of agreement. We are able
to offer these SLA due to our high quality and reliable network. Our SLA provides customers with credit against the amount invoiced
for the services if our service quality fails to meet the prescribed standards. Subscribers to our IP Service receive technical
support 24 hours a day and seven days a week. We guarantee the performance of the following elements under our SLA:
|
·
|
100% availability of our network,
|
|
·
|
the maximum average latency, or time necessary to transmit a signal, between designated POPs, and
|
|
·
|
prompt notification of outages and/or disruptions.
|
We believe that business customers will continue to increase
their use of the Internet and increasingly rely on the Internet as a business tool.
IIJ FiberAccess/F and IIJ DSL/F (Broadband Services).
IIJ FiberAccess/F and IIJ DSL/F are broadband Internet connectivity services that use “FLET’S” services
for fiber optic access and ADSL access provided by NTT East, NTT West and others, allowing service on a best-efforts basis. The
services are used mainly to connect branch offices and headquarters. We support this service by providing guarantees of latency
rates under SLA.
IIJ Mobile Service.
This service provides
wireless 3G and LTE Internet connectivity services to enterprise customers as an MVNO. We use the wireless networks of NTT Docomo
and KDDI, which we added to our service-lineups from April 2015. We used to use EMOBILE Ltd’s wireless network for this
service, but on May 31, 2016 our mobile services using EMOBILE network were terminated. We offer mobile services based on our
MVNO infrastructure to meet corporate customers’ needs. Such needs include remote access solutions, which are wireless solutions
that allow employees working outside of an office to access work-related files, and other needs including M2M connectivity and
MVNO platform services.
Dial-up Access Services.
We offer
a variety of dial-up access services. Our dial-up services allow employees that are out of the office or frequent travelers to
access the Internet or their own internal networks through one of our POPs or through our roaming access points. When accessing
their internal network, for security purposes, it is usually accessed using the VPN function that is provided by our outsourcing
services or systems integration.
Other Internet connectivity services.
In
addition to the services mentioned above, we also offer services such as IIJ ISDN/F which provides Internet access for ISDN lines,
IIJ Line Management/F service that procures “FLET'S” services on behalf of customers and “LaIT” (pronounced
"light") service, a brand that offers high-quality services at reasonable prices to small and medium enterprises. The
main sales channels for LaIT are through direct sales via online sign-up or through sales partners.
Internet Connectivity Services
for Consumers
We offer internet connectivity services for consumers under the
brand names IIJ4U, IIJmio, and hi-ho. We also offer OEM services for other network operators. For Internet connectivity services,
there are a variety of different service line-ups depending on the type of local access, such as ADSL, fiber optic, WiMAX, 3G and
LTE wireless data communication.
In February 2012, we launched LTE mobile data communications services
for consumers in which we offer inexpensive LTE SIM cards to consumers by purchasing NTT Docomo’s mobile infrastructure as
an MVNO. We provide the service from the same MVNO infrastructure from which we provide mobile data communications services to
enterprises which we launched in January 2008. We mainly offer data communications services in a postpaid scheme with a minimum
contract period of one month. The minimum monthly charge is ¥900 with bundled high-speed data volume of 3 GB through one SIM
card. The maximum basic monthly charge is ¥2,560 with bundled high-speed data volume of 10 GB which can be shared among up
to ten SIM cards. If a customer exceeds the bundled high-speed data volume, consumer can purchase what we call a “coupon
card” which is charged with either 500MB or 2GB high-speed data volume for ¥1,500 and ¥3,000 respectively. We started
offering voice function as an optional service with a monthly charge of ¥700 and ¥20 for every 30 seconds for domestic
telephone charge from April 2014. We started to accept Mobile Number Portability (“MNP”) transactions from April 2014.
We also offer LTE SIM cards through prepaid schemes not only for domestic customers but also for foreigners visiting Japan. “Japan
Travel SIM powered by IIJmio” is the service name and the card includes either 1GB of high speed data for 30 days or 2GB
of high-speed data for a three-month period for approximately ¥2,700 and ¥4,000 respectively, depending on the sales channel.
The prices mentioned here are as of June 2016.
WAN Services
We offer WAN services, a closed network service mainly using dedicated
lines, wide-area Ethernet services and IP-VPN services to corporate customers. WAN services offer dedicated, reliable, secure connections
that allow our customers to better control the traffic over the wide-area networks. While IIJ had been providing WAN services to
its corporate customers, the WAN business became a larger portion of the consolidated base business following the acquisition of
IIJ Global on September 1, 2010.
Outsourcing Services
Our customers are increasingly seeking additional network-related
services, in addition to Internet connectivity. We provide our customers with a broad range of outsourcing services such as security-related,
network-related, server-related, data center-related and IIJ GIO/Hosting Package, a line-up of services for an all-in-one non-customizable
hosting package cloud computing service.
We believe that business customers will increasingly rely on outsourcing
services for cost reduction, improving productivity and ensuring reliable network-related operations. Therefore, we will continue
our efforts to improve our services by adding new features and enhancing line-ups through new services by utilizing our Internet
expertise in a timely manner.
Our outsourcing services include:
Security-related outsourcing services.
We offer services that protect customers’ internal network
systems from unauthorized, illegal access, such as firewall services and security scan services. We also provide secure remote
connections to the internal networks. We were the first ISP in Japan to provide firewall services, which we introduced in 1994.
Network-related outsourcing services.
We offer various types of Internet-VPN services and router
rental services such as IIJ Internet-LAN Service, IIJ SMFsx Service and IIJ Managed VPN PRO Service. IIJ SMFsx Service is based
on patented technology, the SEIL Management Framework (“SMF”) which enables centralized management of network-configuration,
administration and maintenance, reducing both configuration and maintenance time and costs for large-scale network construction.
Server-related outsourcing services.
We
offer services such as web hosting, e-mail hosting, document storage and streaming services.
Data center-related services.
We
offer IIJ data center facility services and management and monitoring services. Our Internet data center facility services are
co-location services which allow companies to house their servers and routers off-site on our premises. Our Internet data center
facilities are leased from third parties such as NTT Communications and are equipped with robust security systems, 24-hours-a-day
non-stop power supplies and fire extinguishing systems, and have earthquake-resistant construction and high-speed Internet connectivity
with IIJ backbones. We also offer basic monitoring and maintenance services for the equipment. This service enhances reliability
as we provide 24-hours-a-day monitoring and have specialized maintenance personnel and facilities. We offer management and monitoring
services tailored to our customers’ requirements.
IIJ GIO/Hosting package.
IIJ GIO/Hosting Package is a line-up of services for non-customizable packaged
cloud computing service.
Other services.
In addition to the above, we offer customer support and help desk solutions, an IP
Phone service and other services.
Systems Integration
Our systems integration consists of systems construction and systems
operation and maintenance. Systems construction is tailored to meet each of our customers’ requirements, which include consulting,
project planning, systems design and development of network systems. Our systems construction mainly focuses on Internet business
systems and Intranet and Extranet corporate information systems. We have built a strong record in various business fields.
Examples of systems construction are:
|
·
|
connecting over a hundred locations such as gas stations, bank branches and retail shops via Internet-VPN, transmission of
data over the Internet with an encryption feature and our proprietary SEIL Series routers, SMF, SACM
(1)
and a service
adapter "SA-W1,”
(2)
|
|
·
|
construction of large scale e-mail servers or systems to detect or delete e-mails with viruses or spam or record all e-mails
incoming to and outgoing from customers,
|
|
·
|
construction of websites for online businesses, such as on-line game providers,
|
|
·
|
re-construction of overall corporate network systems suited to increased traffic data,
|
|
·
|
construction of voice-over IP systems to transmit voice to customer branch offices over the Internet,
|
|
·
|
construction of wireless local area networks, and
|
|
·
|
consultation on corporate network security.
|
(1)
|
|
SACM
(Service Adapter Control Manager) is a management service platform for OEMs to provide
automatic connection and a comprehensive management mechanism of IIJ’s proprietary
next-generation network management system, SMFv2.
|
(2)
|
|
SA-W1
is a service adapter developed for SACM.
|
In the consulting and planning phase of a systems construction project,
we form special project management teams for the project. We analyze and design the customer’s network and systems with three
engineering focuses: reliability, flexibility and extendibility.
In the phase of systems design and development of network systems,
we procure equipment such as servers or use IIJ GIO/Component services as a component of the system and manage application development
and software programming tasks which are, depending on the size of the project, outsourced to third parties. Systems construction
is generally provided together with our network services.
In the operation and maintenance phase, by utilizing data center
facilities and IIJ GIO/Component services directly linked to our network, we provide a range of operation and maintenance services,
which take maximum advantage of the Internet system, network operation and management know-how of the IIJ Group companies. Rather
than simply looking after the customer’s servers and equipment, we take care of the customer’s entire computing environment,
as well as custom-designed monitoring systems and provide around-the-clock operation and management services. These outsourcing
services enable customers to free themselves from the burden of operating the network systems, which demands professional operation
and maintenance to ensure prompt and flexible responses to unexpected system problems.
We develop, provide, and invest in a cloud-based foreign exchange
(“FX”) platform which we mainly provide to financial institutions such as securities brokers and FX trading companies
who pay monthly fees primarily based on the volume of transactions.
We have provided our customers with basic and easy-to-order systems
integration services, including provision of network resources such as network equipment, data storage systems, network monitoring
and systems operation management, on demand and on a monthly basis, therefore enabling our customers to launch their internal network
system securely and cost effectively.
Equipment Sales
In addition to the network services and systems integration, we
sell third-party equipment, such as routers, iPads and other equipment to meet the one-stop needs of our customers together with
our in-house developed router, the “SEIL Series.”
SEIL Series.
In August 1998, we introduced
our first SEIL series which was compatible with ISDN. We released our first high-end in-house developed router which was compatible
with broadband in August 1998. As of June 27, 2016 there are SEIL/B1, SEIL/X series and SEIL/x2. With the SMF feature, which provides
auto-configuration features, it enables customers to create a VPN network simply by connecting the network to SEIL WAN interface.
ATM Operation Business
Our ATM operation business is conducted by our consolidated subsidiary,
Trust Networks, which operates ATMs and its network systems and receives a commission for each bank withdrawal transaction when
a customer uses its serviced ATMs. As of March 31, 2016, 1,087 ATMs were in operation in places such as Japanese pachinko parlors.
Network
Our network is one of our most important assets. We have developed
and currently operate a high-capacity network that has been designed to provide reliable, high-speed, high-quality Internet connectivity
services. Our Internet network extends throughout Japan, and to the United States, the United Kingdom, Singapore and Hong Kong.
We are able to achieve and maintain high speeds through our advanced
network architecture, routing technology and load balancing that optimize traffic on our multiple Internet connections.
The primary components of our network are:
|
·
|
our backbone, which includes leased lines and network equipment, such as routers,
|
|
·
|
POPs in major metropolitan areas in Japan,
|
|
·
|
Internet data centers, and
|
|
·
|
a network operations center (“NOC”).
|
Backbone
Leased lines
Our network is anchored by our extensive Internet backbone that
extends throughout Japan, and to the United States, the United Kingdom, Singapore and Hong Kong. We use our expertise in developing
and operating our network to organize and connect these leased lines to form a backbone that has substantial transmission capacity.
As of June 27, 2016, the total capacity between Japan and the United States was 409.6 Gbps.
The physical lines that comprise our backbone are an assembly of
numerous physical lines that are procured from various carriers. The lines which we lease are high-capacity, high-speed digital
transmission lines. The topology of the backbone network, in principal, is a mesh topology with redundancy, therefore the connection
is secured and IIJ’s service will not be interrupted even if either one of the numerous physical lines fails.
The table below lists the total number of contracts comprising
IIJ’s backbone network as of March 31, 2015 and March 31, 2016. Each contract represents one physical line. The largest contract
accounts for only approximately 4% of the total contracted amount.
Total Number of Contracts Comprising IIJ's Backbone
Network
|
|
As
of March 31, 2015
|
|
As
of March 31, 2016
|
Number of Contracts comprising IIJ’s backbone network
|
|
|
|
|
|
|
|
|
NTT Group
|
|
|
99
|
|
|
|
63
|
|
KDDI
|
|
|
50
|
|
|
|
41
|
|
Others
|
|
|
51
|
|
|
|
35
|
|
Total
|
|
|
200
|
|
|
|
139
|
|
If IIJ is unable to renew any of its contracts with either of the
companies listed above, IIJ can continue with its business by procuring additional physical line services from other telecommunications
carriers that offer the best terms or charges in the ordinary course of business. There are over ten additional telecommunications
carriers that we can procure physical lines from. A majority of the contracts that comprise IIJ’s backbone network are one-year
renewable contracts and IIJ can renew or upgrade its existing contracts or replace them with other telecommunications carrier services
if they can be replaced with better terms in the ordinary course of business.
Accordingly, IIJ is not substantially dependent on a particular
contract with either NTT or KDDI nor is the amount of a particular contract substantially large. Further, IIJ is neither substantially
dependent on a certain arrangement or relationship with a particular carrier or carriers because IIJ has the ability to replace
its existing contracts with others under fair terms.
The table below shows our backbone cost related to leasing lines.
Backbone Cost related to Leased Lines
|
|
For
the fiscal year ended March 31,
(millions of yen)
|
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
Backbone cost
|
|
¥
|
3,371
|
|
|
¥
|
3,535
|
|
|
¥
|
3,764
|
|
|
¥
|
3,744
|
|
|
¥
|
3,638
|
|
Network equipment
We use advanced equipment in our network. Our primary routers in
our network are Cisco and Juniper routers. The size of our routers varies depending on the number of customers and volume of traffic
served by our POPs. At each POP we connect our dedicated line to Cisco or Juniper backbone routers which then transmit and receive
information throughout our network. We primarily lease our network equipment under capital lease arrangements.
Points of Presence
POPs are the main points at which our customers connect to our
backbone. We provide Internet connectivity from our POPs to commercial and residential customers through leased lines and dial-up
connections over local exchange facilities. As of June 27, 2016, we operate 30 primary POPs for dedicated access and one universal
POP for nationwide dial-up access in Japan. The universal POP can be accessed from anywhere in Japan with a minimum local telephone
charge.
Many of our POPs are located in the same facilities where other
major carriers and ISPs have their POPs, in facilities of various carriers in Japan like NTT Communications and KDDI. We mainly
lease the physical space. We maintain our routers and other networking equipment at these POPs. Our POPs are in, or in close proximity
to, the same buildings in which the switches and routers of these carriers and ISPs are located enabling quick and easy interconnection
of our equipment with theirs.
Internet Data Centers
As of June 27, 2016, we operate 26 Internet data centers, 20 in
Japan and six abroad; seven in Tokyo, three in Osaka, two each in Yokohama and Nagoya, and one each in Saitama, Sapporo, Sendai,
Kyoto, Fukuoka, Matsue, New York, San Jose, Los Angeles, London, Shanghai and Singapore. These data centers are specifically designed
for application hosting, IIJ GIO services, co-location services and high capacity access to our networks. Excluding the container-based
module type data center in Matsue, our data centers are leased. In Japan, they are mainly leased from NTT Communications, ITOCHU
Techno-Solutions Corporation, Mitsubishi Corporation, and KDDI. The container-based module type data center in Matsue is directly
owned and operated by us.
These data centers have 24-hours-a-day, seven-days-a-week operations
and security and are equipped with uninterruptible power supplies and backup generators, anti-seismic damage precautions, fire
suppression equipment and other features to optimize our ability to offer high-quality services through these data centers.
The container-based module type data center in Matsue is specifically
designed for the use of our cloud computing service IIJ GIO which uses outside-air-cooling, the first in Japan. The main features
of the Matsue container-based module type data center are its cost efficiency and its short construction period of approximately
two to three months to add one container-based module, which allows it to start small and expand along with the rise in demand,
unlike building type data centers where you need to build the whole capacity at once regardless of the demand. The second module
type data center site in Matsue opened in December 2013 and can host up to 48 container-based modules, 24 container-based modules
per site.
Network operations center and
technical and customer support
Our NOC in Tokyo operates 24-hours-a-day, seven-days-a-week. From
our NOC, we monitor the status of our network, the traffic on the network, the network equipment and components and many other
aspects of our network including our customers’ dedicated access lines leased from carriers. From our NOC, we monitor our
networks to ensure that we meet our commitments under our SLA.
Our Group Companies
We offer our services directly and with our group companies. As
of June 27, 2016, we had 15 consolidated subsidiaries and eight equity method investees. Our group companies work closely together
in providing total network solutions to our customers. We collaborate on the development of various services and products and market
our services and products together as a group and offer as a group our total network solutions. ATM operation business is conducted
by Trust Networks.
The table below sets out our group companies, including our major
subsidiaries and equity method investees and our direct and indirect ownership of each of them as of March 31, 2016:
Company Name
|
|
Jurisdiction
of
Incorporation
|
|
Proportion
of ownership
and voting interest
|
Consolidated Subsidiaries:
|
|
|
|
|
|
|
IIJ Global Solutions Inc.
|
|
Japan
|
|
|
100.0
|
%
|
IIJ Engineering Inc.
|
|
Japan
|
|
|
100.0
|
%
|
hi-ho Inc.
|
|
Japan
|
|
|
100.0
|
%
|
Trust Networks Inc.
|
|
Japan
|
|
|
79.5
|
%
|
IIJ Innovation Institute Inc.
|
|
Japan
|
|
|
100.0
|
%
|
Net Chart Japan Inc.
|
|
Japan
|
|
|
100.0
|
%
|
RYUKOSHA NETWARE Inc.
|
|
Japan
|
|
|
100.0
|
%
|
IIJ America Inc.
|
|
U.S.A.
|
|
|
100.0
|
%
|
IIJ Europe Limited
|
|
U.K.
|
|
|
100.0
|
%
|
IIJ Global Solutions China Inc.
|
|
China
|
|
|
100.0
|
%
(1)
|
IIJ Global Solutions Singapore Pte. Ltd.
|
|
Singapore
|
|
|
100.0
|
%
(2)
|
and
four other subsidiaries
(3)
|
|
|
|
|
|
|
Equity method investees:
|
|
|
|
|
|
|
Trinity Inc.
|
|
Japan
|
|
|
33.8
|
%
|
INTERNET MULTIFEED CO.
|
|
Japan
|
|
|
33.0
|
%
|
Internet Revolution Inc.
|
|
Japan
|
|
|
30.0
|
%
|
PT Biznet Gio Nusantara
|
|
Indonesia
|
|
|
40.0
|
%
|
Leap Solutions Asia co. Ltd.
|
|
Thailand
|
|
|
40.0
|
%
|
and
three other equity method investees
(4)
|
|
|
|
|
|
|
(1)
|
100%
owned subsidiary of IIJ Global Solutions Inc.
|
(2)
|
IIJ
owned a 51.1% voting interest directly and a 48.9% indirectly through IIJ-Global.
|
(3)
|
The
four other subsidiaries are IIJ Deutschland GmbH, IIJ Global Solutions Hong Kong Ltd.,
IIJ-Global Solutions (Thailand) Co., Ltd., and PT. IIJ Global Solutions Indonesia.
|
(4)
|
The
three other equity method investees are Appiaries Corporation, KIS, Inc, and e-CORPORATION.JP.
Ltd.
|
IIJ Global Solutions Inc.
On September 1, 2010, IIJ acquired 100% of the equity of IIJ-Global
from AT&T Japan for the amount of ¥9.2 billion. IIJ-Global is incorporated under the laws of Japan. IIJ-Global provides
mainly domestic network outsourcing service businesses, such as WAN services. To fulfill the demands of our Japanese clients that
are headed abroad to expand their overseas business, together with IIJ, IIJ-Global has been enhancing its business abroad in Asian
countries such as China, Singapore and Thailand. As of March 31, 2016, IIJ-Global had 338 employees, 16 of whom were seconded from
IIJ.
IIJ Engineering Inc.
IIJ Engineering Inc. (“IIJ-EG”), whose name has been
changed from Net Care, Inc. as of October 1, 2014, provides a broad array of support services, from monitoring and troubleshooting
to network operations and data center operations. As of March 31, 2016, IIJ-EG had 453 employees, 18 of whom were seconded from
IIJ.
hi-ho Inc.
hi-ho Inc. (“hi-ho”) provides Internet connectivity
services for consumers under hi-ho brand. As of March 31, 2016, hi-ho had 27 employees, three of whom were seconded from IIJ.
Trust Networks Inc.
Trust Networks Inc. (“Trust Networks”) was established
in July 2007 and IIJ had invested a total of ¥2.6 billion in Trust Networks as of March 31, 2016 (79.5% ownership). Trust Networks
operates bank ATMs and its network systems and receives a commission for each bank withdrawal transaction when a customer uses
its serviced ATMs. As of March 31, 2016, Trust Networks had 1,087 ATMs in operation. As of March 31, 2016, Trust Networks had 14
employees, ten of whom were seconded from IIJ.
IIJ Innovation Institute Inc.
IIJ Innovation Institute Inc. (“IIJ-II”) mainly engages
in research and development of basic Internet-related technology. On July 1, 2009, IIJ Research Laboratory, one of the research
departments of IIJ, was transferred to IIJ-II to strengthen the Group research and development by reclassifying the Group research
and development organization. As of March 31, 2016, IIJ-II had 19 employees, all of whom were seconded from IIJ.
Net Chart Japan Inc.
Net Chart Japan Inc. (“NCJ”) provides network construction
services that are mainly related to Local Area Networks, such as installation and configuration of equipment, wiring following
network installation, and installation and operation support for applications. As of March 31, 2016, NCJ had 75 employees.
RYUKOSHA NETWARE Inc.
RYUKOSHA NETWARE Inc. (“RYUKOSHA”) engages in human
resources outsourcing, including systems operation and service support. RYUKOSHA became IIJ’s wholly owned subsidiary as
of December 1, 2014. As of March 31, 2016, RYUKOSHA had 285 employees.
IIJ America Inc.
IIJ America Inc. (“IIJ-America”) is a U.S.-based ISP
that also provides cloud computing services and offers systems integration solutions, catering primarily to the U.S.-based operations
of Japanese companies. As of March 31, 2016, IIJ-America had 39 employees, nine of whom were seconded from IIJ.
IIJ Europe Limited
IIJ Europe Limited (“IIJ-Europe”) offers systems integration,
Internet connectivity services and cloud computing services primarily to Japanese companies operating in Europe. As of March 31,
2016, IIJ-Europe had 57 employees, three of whom were seconded from IIJ.
IIJ Global Solutions China Inc.
IIJ-Global Solutions China Inc. (“IIJ-Global China”)
is a China-based systems integrator and cloud computing services provider catering primarily to China-based operations of Japanese
companies. As of March 31, 2016, IIJ-Global China had 18 employees.
IIJ Global Solutions Singapore
Pte. Ltd.
IIJ-Global Solutions Singapore Pte. Ltd. (“IIJ-Global Singapore”) is a Singapore-based systems integrator
and cloud computing services provider catering primarily to Singapore-based operations of Japanese companies. As of March 31, 2016,
IIJ-Global Singapore had 15 employees.
Trinity Inc.
Trinity Inc. (“Trinity”) is one of the subsidiaries
of Hirata Corporation, which manages customer loyalty reward program systems. As of March 31, 2016, Trinity is our equity method
investee with a 33.8% ownership.
INTERNET MULTIFEED CO.
INTERNET MULTIFEED CO. (“Multifeed”) provides high-speed
Internet eXchange (“IX” — where major ISPs exchange network traffic) service. Its technology was developed jointly
with the NTT Group. Multifeed operates IXs named JPNAP. As of March 31, 2016, Multifeed is our equity method investee with a 33.0%
ownership.
Internet Revolution Inc.
In February 2006, IIJ and Konami Corporation established a joint
venture company, Internet Revolution Inc. (“i-revo”) initially to operate a portal website. i-revo now provides operation
of gaming platform for the Konami Group. As of March 31, 2016, i-revo is our equity method investee with a 30.0% ownership.
PT Biznet Gio Nusantara
In January 2015, IIJ and Biznet Networks, a major communications
services company in Indonesia, established a joint venture company, PT Biznet Gio Nusantara (“PT Biznet GIO”), to offer
public and private cloud computing services mainly to local companies in Indonesia. As of March 31, 2016, PT Biznet GIO is our
equity method investee with a 40.0% ownership.
Leap Solutions Asia co. Ltd.
In February 2016, IIJ and T.C.C. Technology Co., Ltd., a leading
data center and IT infrastructure service provider in Thailand, established a joint venture company, Leap Solutions Asia co. Ltd.,
to provide full-scale cloud services in Thailand. As of March 31, 2016, Leap Solutions Asia Co. Ltd., is our equity method investee
with a 40.0% ownership.
Capital Expenditures
The table below shows our capital expenditures, which we define
as amounts paid for purchases of property and equipment plus acquisition of assets by entering into capital leases, for the last
three fiscal years.
|
|
For
the fiscal year ended March 31,
|
|
|
2014
|
|
2015
|
|
2016
|
|
|
(millions of yen)
|
Capital expenditures, including capitalized leases
(1)
|
|
¥
|
12,560
|
|
|
¥
|
11,835
|
|
|
¥
|
14,812
|
|
_____________________
(1)
|
Further
information regarding capital expenditures, including capitalized leases and a reconciliation
to the most directly comparable U.S. GAAP financial measure, can be found in Item 3.A.,
“Selected Financial Data— Reconciliations of the Disclosed Non-GAAP Financial
Measures to the Most Directly Comparable GAAP Financial Measures.”
|
Most of our capital expenditures, which are funded largely by cash
generated from operations, proceeds from issuance of common stock, and leases, relate primarily to the development, expansion,
improvement and maintenance of our network and service infrastructures and of our own internal back-office systems. The investments
are mostly for routers, servers, network equipment, containers for our container type data centers and other facilities necessary
to offer services related to our network and software. Capital expenditures for the fiscal year ended March 31, 2016 increased
compared with the previous fiscal year mainly because capital expenditures related to cloud computing services increased along
with the development of new cloud services.
We estimate that our expected capital expenditures, including capitalized
leases, for the fiscal year ending March 31, 2017 related to our network services and systems integration business will be slightly
higher than the amount for the fiscal year ended March 31, 2016.
Seasonality
See Item 5.D., “Trend Information — Factors Affecting
Our Future Financial Results — Systems integration revenues, including related equipment sales revenues.”
Sales and Marketing
Our sales headquarters are located in Tokyo. In addition, we have
eight branches, Osaka, Nagoya, Fukuoka, Sapporo, Sendai, Yokohama, Toyama, and Hiroshima and two offices in Toyota and Okinawa
in order to cover the major metropolitan areas in which the majority of large Japanese companies operate. As of March 31,
2016, we had 516 employees, on a consolidated basis, working in sales and marketing. The Business Unit, where our domestic sales
and marketing employees are assigned, is divided into twelve divisions and two departments:
|
·
|
Enterprise Business Divisions 1 and 2
focus on selling total network solutions and work with large corporate clients,
including manufacturers and retail companies.
|
|
·
|
Service Product Business Division
focuses on promoting “IIJ GIO Infrastructure P2” and “IIJ Omnibus
Services,” two of our new services and also focuses on enhancing partner business.
|
|
·
|
Financial Systems Business Division
focuses on selling its total network solutions and work with financial institutions.
|
|
·
|
Government, Public & Educational Organization Business Division
focuses on selling total network solutions and works
with governmental institutions, and universities and other schools.
|
|
·
|
West Japan Business Division
focuses on developing and strengthening partnerships with customers in the western Japan
area. Sales personnel in branch and sales offices are part of this division.
|
|
·
|
Central Japan Business Division
focuses on developing and strengthening partnerships with customers in the central Japan
area such as Nagoya. Sales personnel in branch and sales offices are part of this division
|
|
·
|
East Japan Business Division
focuses on developing and strengthening partnerships with customers in the eastern Japan
area except for the Kanto area. Sales personnel in branch and sales offices are part of this division.
|
|
·
|
Enterprise Business System Development Division
is comprised of pre-sales engineers who focus on meeting specific IT
needs of corporations by, for example, integrating network services and systems integration.
|
|
·
|
Outsourcing Division
focuses on promoting business enterprises to outsource their IT systems by offering needed services
and/or operating systems for them.
|
|
·
|
Marketing Division
focuses mainly on setting the tariff pricing for each of IIJ’s services, makes and conducts
promotion plans related to its products and services as well as strengthening partnerships with sales agents such as systems integrators
to expand our marketing reach.
|
|
·
|
Global Business Division
is in charge of planning and administration of overseas business development.
|
|
·
|
Operation Management Department
is in charge of back office operations such as those related to processing sales orders
for business divisions.
|
|
·
|
Strategic Business Department
focuses on promoting the sales of our focused services such as IIJ GIO services, IP services,
security-related services, mobile services and corporate network solutions.
|
|
·
|
Business Unit Management Department
is in charge of back office operations such as those related to processing sales
order for business divisions.
|
Customers
As of March 31, 2016, we had over 8,500 business and other institutional
customers and approximately 1.4 million individuals including individual customers subscribing to our mobile and OEM services.
Our main customers continue to be major corporations, including ISPs.
Research and Development
Research and Development Organization
Our research and development activities are conducted by IIJ Innovation
Institute (“IIJ-II”) and IIJ’s internal organizations in charge of technology.
IIJ Innovation Institute
.
IIJ established
IIJ-II in June 2008 as a wholly-owned subsidiary, which engages in research and development of basic Internet-related technology
development. In July 2009, IIJ Research Laboratory, which was established as a research organization of IIJ in April 1998 to engage
in new basic network technologies, was transferred to IIJ-II to reorganize and strengthen the Group's research and development
capabilities. IIJ-II is currently participating in various research and development activities in cooperation with organizations
from the private and academic sectors. IIJ-II is engaged in research and development activities related to big data, cloud computing-related
research and development, security related research, e-mail technologies and network traffic analysis, the deployment and implementation
of IPv6, among various other activities.
IIJ’s internal organizations in charge of technology.
IIJ’s internal organizations such as the Service Product Business Division, Infrastructure Division, the Network Division,
and the Cloud Division, play an important role in the research and development of technologies to be applied to our services and
solutions, collect information, evaluate new technology and conduct business expansion.
Research and Development Strategy
Our primary research and development objective is to continue to
develop innovative services, applications and products that meet the current and future demands of our customers and to continue
to be at the forefront of the Internet industry in Japan. Many of our engineers are regularly engaged in research and development
activities related to the development of new services, applications and products. These engineers have continued to develop innovative
services, applications and products, many of which have set the standard for the Internet industry in Japan. They also work very
closely with our sales and marketing personnel and technical engineers to ensure that the innovative services, applications and
products will meet the demands of our customers.
Our second research and development objective is to continue participating
in or otherwise closely monitor new products, developments and initiatives of manufacturers and standards-setting and research
groups. We have also engaged in the research and development of new Internet-related basic technology since 1998. Through these
efforts, we seek to ensure that we have timely and effective access to new technologies, and that we implement these technologies
effectively.
In furtherance of these objectives, our research and development
efforts currently are focused on a variety of projects, including:
|
·
|
research and development of the basic technologies for cloud computing-related technology including SDN platform software,
|
|
·
|
research and development of methodology to solve the technical problems of the current cloud computing systems,
|
|
·
|
research and development of the basic technologies for a storage system for a wide area data center operation to enable flexible
location and relocation of virtual machines,
|
|
·
|
research and development of methodology to construct a virtualized large-scale data center with an assembly of a small-scale
data center,
|
|
·
|
research and improvement of a next generation container-based module type data center using indirect and/or outside-air cooling
systems year-round,
|
|
·
|
research and development of electric feeding methodology with high efficiency, and adoption to a next generation container-based
module type data center,
|
|
·
|
development and commercialization of cloud-based Power Metering System (PMS) Service Platform, a system platform for providing
services that make use of smart meter,
|
|
·
|
research of Internet traffic monitoring and management,
|
|
·
|
research relating to the behavior of Internet routing systems,
|
|
·
|
research and development of IPv6-based communication technology,
|
|
·
|
continued improvement of our SEIL router and SMF, systems which we developed specifically to be integrated into IIJ’s
network-related services,
|
|
·
|
research relating to the methodology of configuration of routers and other servers, and
|
|
·
|
research and development of the Distributed and Parallel Processing Platform for very large data sets.
|
Our research and development expenses averaged less than 1.0% of
total revenues for the past three consecutive years. For the fiscal years ended March 31, 2014, 2015 and 2016, our research and
development expenses were ¥421 million, ¥441 million and ¥455 million, respectively, most of which were for personnel
expenses. The level of research and development expenditures is low in relation to our total costs primarily because we do not
engage in extensive research and development of new technologies and products that require large investments. Rather, as noted
above, we are intensively engaged in research and development related to our ongoing business. We focus on monitoring developments
in the industry and in developing new and innovative services and applications by utilizing and enhancing existing technologies
and products.
Because the rate of change in technology relevant to our business
is so rapid, we believe that the sophistication and experience of our research and development personnel is an important part of
our success.
Proprietary Rights
Although we believe that our success is more dependent upon our
technical, marketing and customer service expertise than our proprietary rights, we rely on a combination of trademark and contractual
restrictions to establish and protect our technology.
Licenses
For us to provide certain services to our customers, we have, as
a licensee, entered into license agreements with suppliers including Trend Micro Incorporated, RSA Security Inc., NRI Secure Technologies,
Ltd., McAfee, Inc. (Intel Security), Microsoft Japan Co., Ltd., Adobe Systems Software Ireland Limited and Oracle Corporation Japan.
We have purchased licenses from these suppliers in accordance with
customer demands for our services.
Trademarks
We have applied for trademark registrations of our corporate name,
“Internet Initiative Japan Inc.” and certain other corporate and product names in Japan, the United States and certain
European and Asian countries.
Patents
We have applied for patent registrations in relation to our technology
in Japan and the United States. As of June 27, 2016, ten registrations had been granted, with one pending application. The latest
acquired patent is for technology to implement connection credentials using both ID of access point and media access control address
of terminal devices in a network environment that has multiple access points.
Legal Proceedings
We are involved in normal claims and other legal proceedings in
the ordinary course of business. We are not involved in any litigation or other legal proceedings that, if determined adversely
to us, we believe would individually or in the aggregate have a material adverse effect on us or our operations.
Regulations of the Telecommunications Industry in
Japan
The MIC regulates the Japanese telecommunications industry. Telecommunications
carriers, including us, are regulated by the MIC primarily under the Telecommunications Business Law.
The
Telecommunications Business Law
The Telecommunications Business Law, which became effective in 1985,
was established for the purpose of privatization and deregulation in the telecommunications business. After several amendments,
the Telecommunications Business Law was considerably amended in July 2003, and the amended Telecommunications Business Law became
effective as of April 2004. Further, an amendment to the Telecommunications Business Law was enacted on June 3rd, 2014 and the
amended Telecommunications Business Law will become effective on June 1, 2015. From here on, “Telecommunications Business
Law” refers to the latest amended Telecommunications Business Law. A summary of the regulations under the current Telecommunications
Business Law is as follows:
The Telecommunications Business Law applies to the telecommunications
business, except for the telecommunications business exempt under the Telecommunications Business Law (“Exempted Business”).
(1)
The term “telecommunications business” is defined under the Telecommunications Business Law as a business
providing telecommunications services in order to meet the demand of others.
(2)
The term “telecommunications
services” is defined under the Telecommunications Business Law as intermediating communications of others through the use
of telecommunications facilities, or any other acts of providing telecommunications facilities for the use of communications of
others. Our business falls under the definition of a telecommunications business, not an Exempted Business, and therefore is subject
to the Telecommunications Business Law.
_____________________
(1) An Exempted Business
is a business related to facilities supplying broadcast services, wire radio broadcasting, wire broadcast telephone services,
wire television broadcasting services, or the acceptance of applications for the use of cable television broadcasting facilities.
(2) The provisions of this
Law shall not apply to the telecommunications businesses listed in the following items:
|
(i)
|
a telecommunications business
which exclusively provides telecommunications services to a single person (except one
being a telecommunications carrier);
|
|
(ii)
|
a telecommunications business
which provides telecommunications services with telecommunications facilities, a part
of which is to be established on the same premises (including the areas regarded as the
same premises) or in the same building where any other part thereof is also to be established,
or with telecommunications facilities which meet the standards stipulated in the ministerial
ordinance of the MIC; and
|
|
(iii)
|
a telecommunications business
which does not install telecommunications circuit facilities but which provides telecommunications
services other than the telecommunications services which intermediate communications
of others by using telecommunications facilities;
|
Provided that the provisions
of Article 3 and Article 4 of the Telecommunications Business Law apply to communications handled by a person who operates the
telecommunications business listed above
.
Start-up
of Services
|
·
|
Registration/Notification
|
Registration with the Minister of the MIC is required for
start-up telecommunications businesses that intend to provide telecommunications services. However, for telecommunications businesses
which meet either of the following two requirements, only a notification to the Minister of the MIC is required: (i) the scale
of the telecommunications circuit facilities which are to be installed and the scope of the area covered thereby do not exceed
a certain threshold established by the ministerial ordinance of the MIC (i.e., areas of installation of terminal-related transmission
facilities are limited to a single municipality (city, town or village) and areas of installation of relay-related transmission
facilities are limited to a single prefecture) or (ii) telecommunications circuit facilities to be installed fall within a certain
category of radio facilities as set forth in the Radio Act (i.e., radio facilities which conduct radio communications (except
for basic broadcasting) as well as basic broadcasting). Our business is subject to this latter notification requirement.
Terms and Conditions of Provision of Services and Charge
|
·
|
Our business is unregulated, in general, as IIJ does not fall under either Basic Telecommunications Services or Designated
Telecommunications Services described below.
|
|
·
|
Prior notification to the Minister of the MIC is required for the Basic Telecommunications Services (universal services specified
by the ministerial ordinance of the MIC, i.e., analog or public fixed telephone services, analog or public remote island telephone
services, and analog or public emergency call telephone services). Providing these telecommunications services in a manner other
than that pursuant to the terms and conditions and charges notified to the Minister of the MIC is prohibited, provided that the
charges may be discounted or waived pursuant to the exception criteria provided under the ministerial ordinance of the MIC (i.e.,
an emergency call for the safety of ships and airplanes, an emergency call for the safety of life and property in case of natural
disaster, calls to police agencies regarding crimes, and calls to the fire brigade).
|
|
·
|
Prior notification to the Minister of the MIC is required for Designated Telecommunications Services (i.e., services provided
through Category I Designated Telecommunications Facilities and which meet the criteria provided by the ministerial ordinance of
the MIC as the services for which the guarantee of the terms and conditions and charges are necessary for the protection of users,
such as the basic fee). “Category I Designated Telecommunications Facilities” are facilities which meet the criteria
specified by the ministerial ordinance of the MIC as being fixed telecommunications facilities used for the services which are
offered to a substantial percentage of users in a given area, and which are currently only the facilities of NTT East and NTT West.
Providing these telecommunications services in a manner other than that pursuant to the terms and conditions and charges notified
to the Minister of the MIC is prohibited, unless the telecommunications carrier and the user agree otherwise, provided that the
charges may be discounted or waived in Emergency Cases, for emergency calls for injured persons in a ship, and for use by a police
agency, fire brigade and broadcasting companies.
|
|
·
|
The Minister
of the MIC at least once a year notifies the telecommunications carrier providing the
Specific Designated Telecommunications Services specified by the ministerial ordinance
of the MIC (i.e., Designated Telecommunications Services other than voice services, except
for telephone and general digital services and data transmission services) the price
cap regarding such services. The telecommunications carriers are required to obtain approval
from the Minister of the MIC if a proposed change in charges exceeds the price cap.
|
Articles of Interconnection
Agreements
|
·
|
Our business
is unregulated, in general, as IIJ does not fall under either Category I Designated Telecommunications
Facilities or Category II Designated Telecommunications Facilities described below.
|
|
·
|
Approval from
the Minister of the MIC is required for Category I Designated Telecommunications Facilities.
|
|
·
|
Prior notification
to the Minister of the MIC is required for Category II Designated Telecommunications
Facilities (i.e., the facilities which meet the criteria provided by the ministerial
ordinance of the MIC as being mobile telecommunications facilities used for services
which are offered to a substantial percentage of users in a given area, and which are
currently NTT Docomo, Okinawa Cellular and KDDI).
|
Telecommunications Facilities
of Carriers
|
·
|
A telecommunications carrier that any of the following items applies to shall maintain its telecommunications facilities (except
telecommunications facilities stipulated in the ministerial ordinance of the MIC as those having a minor influence on the users'
benefit in the cases of damage or failure thereof) in compliance with the technical standards specified in the applicable ministerial
ordinance of the MIC.
|
|
(1)
|
telecommunications carrier that installs telecommunications circuit facilities
|
|
(2)
|
a telecommunications carrier that provides Universal Telecommunications Services
|
|
(3)
|
a telecommunications carrier (excluding those falling under 2 above) that both of the following items apply to and that is
designated by the Minister of the MIC as a telecommunications carrier that shall maintain its telecommunications facilities properly
(“Carrier without Circuit Facilities”):
|
|
·
|
having more than one million users at the end of the previous fiscal year; and
|
|
·
|
charging service fees as compensation for providing telecommunications services.
|
Such telecommunications carriers shall confirm themselves that said telecommunications
facilities are in compliance with the technical standards specified in the applicable ministerial ordinance of the MIC.
|
·
|
Telecommunications carriers that install telecommunications circuit facilities, that provide Universal Telecommunications Services
or that are Carriers without Circuit Facilities shall establish their own administrative rules governing said telecommunications
facilities in accordance with the ministerial ordinance of the MIC in order to ensure the reliable and stable provision of telecommunications
services. These administrative rules shall provide the necessary rules with which said telecommunications carriers shall comply
with respect to the policy, the structure and the method of the administration of the telecommunication facilities and the appointment
of the general administrator of the telecommunication facilities in accordance with the ministerial ordinance of the MIC. Telecommunications
carriers that install telecommunications circuit facilities and telecommunications carriers that provide Universal Telecommunications
Services shall submit such administrative rules to the Minister of the MIC prior to the commencement of operations and Carriers
without Circuit Facilities must submit them within three months after the date they are designated as Carriers without Circuit
Facilities by the Minister of the MIC as above. When these telecommunications carriers amend their administrative rules, they shall
submit a notification in respect of the amended matters to the Minister of the MIC without delay.
|
|
·
|
Although the regulations described above currently do not apply to us, there is a possibility that we will be designated as
a Carrier without Circuit Facilities in the future depending on the increase of the number of users of our telecommunications services.
|
Protection of users
|
·
|
Telecommunications carriers, as well as business operators that are entrusted by telecommunications carriers with acting as
an intermediary in entering into contracts relating to telecommunications services, etc., are required to explain, in accordance
with the ministerial ordinance of the MIC, to users (except for uses who are telecommunications carriers) an outline of charges
and other terms and conditions of their services, when entering into certain contracts with users in relation to telecommunications
services as specified in the Telecommunications Business Law.
|
|
·
|
Telecommunications carriers shall, when the said contracts are validly established, prepare documents containing items as specified
in the ministerial ordinance of the MIC and deliver such documents to the users. Telecommunications carriers may, by obtaining
the approval of the users, provide the users with the said documents by electromagnetic means in lieu of the delivery of them,
in accordance with the ministerial ordinance of the MIC.
|
|
·
|
Telecommunications carriers are required, when a user offers to cancel a contract relating to telecommunications services as
specified under the Telecommunications Business Law within a certain period after the receipt of the said document, to accept cancellation
of the contract without demanding that the user pay any compensation or cancellation fees, etc. (except for charges for the telecommunications
services provided before the cancellation and other charges as specified in the ministerial ordinance of the MIC).
|
|
·
|
When telecommunications carriers entrust a business operator with acting as an intermediary in entering into contracts relating
to telecommunications services and/or performing other business activities incidental thereto, telecommunications carriers shall
exercise supervision and necessary measures over them in order to ensure the proper and secure execution of such entrusted business,
in accordance with the ministerial ordinance of the MIC.
|
Order to Improve Business Activities
|
·
|
The Minister of the MIC may, if it is deemed that business activities of a telecommunications carrier fall under inappropriate
cases set forth in the Telecommunications Business Law, insofar as it is necessary to ensure the users’ benefit or the public
interest, order the telecommunications carrier to take actions to improve operations methods or other measures.
|
Right of Way Privilege for Authorized
Carriers
|
·
|
A telecommunications carrier which is engaged, or intends to engage, in the telecommunications business by installing telecommunications
circuit facilities and which wishes to have the privileged use of land or other public utilities for circuit facilities deployment,
must obtain authorization for the entire or a part of the relevant telecommunications business from the Minister of the MIC.
|
Merger, Business Transfer or
Divestiture of Carriers
|
·
|
Post facto notification to the Minister of the MIC without delay is required.
|
Business Suspension, Abolition
or Dissolution of Carriers
|
·
|
Post facto notification to the Minister of the MIC without delay is required. Prior announcement of withdrawals to service
users is required in accordance with ministerial ordinances of the MIC.
|
Foreign Capital Participation
|
·
|
Prior notification is required under the Foreign Exchange and Foreign Trade Law for the acquisition of shares of telecommunications
carriers to which registration for start-up services is applicable. This is not applicable to purchasers of ADSs. The one-third
foreign ownership restriction is applicable only to NTT East and NTT West.
|
C.
|
|
Organizational Structure
|
The information required by this item is included in “Our
Group Companies” above.
D.
|
|
Property, Plant and Equipment
|
Property and equipment recorded on our consolidated balance sheet
as of March 31, 2015 and March 31, 2016 consisted of the following:
|
|
As
of March 31
|
|
|
2015
|
|
2016
|
|
|
(millions of yen)
|
Data communications equipment
|
|
¥
|
11,159
|
|
|
¥
|
14,356
|
|
Office and other equipment
|
|
|
2,746
|
|
|
|
2,065
|
|
Land
|
|
|
538
|
|
|
|
538
|
|
Buildings
|
|
|
1,645
|
|
|
|
1,663
|
|
Leasehold improvements
|
|
|
3,798
|
|
|
|
3,904
|
|
Capitalized software
|
|
|
24,805
|
|
|
|
28,815
|
|
Assets under capital leases, primarily data communications equipment
|
|
|
24,271
|
|
|
|
28,329
|
|
Total
|
|
|
68,962
|
|
|
|
79,670
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(39,592
|
)
|
|
|
(45,346
|
)
|
Property and equipment-net
|
|
¥
|
29,370
|
|
|
¥
|
34,324
|
|
Our fixed assets consist mainly of (i) data communications equipment
necessary to offer services on our network, such as routers, servers and other network equipment, which are mainly acquired under
capital leases and (ii) software, such as that for back-office systems, virtualization software and others for cloud computing
services, FX service application software and others. Most of our property and equipment are located in Japan. The above-mentioned
property and equipment consists of many relatively small assets and, as of March 31, 2016, we did not own any major land, buildings
or facilities such as factories except for the properties related to the container-based module type data center in Matsue. The
container-based module type data center in Matsue is directly owned and operated by us. Other than the above assets recorded on
our consolidated balance sheet, we use operating lease assets such as backbone lines, local access line, office premises, and network
operation centers. There are no known environmental issues that may affect our utilization of our property and equipment.
Please also see
“Network” above and Note 7 “Property and Equipment”
and Note 9 “Leases” to our consolidated financial statements included in this annual report on Form 20-F.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
You should read the following discussion of our financial condition
and results of operations together with Item 3.A. of this annual report on Form 20-F and our consolidated financial statements
and the notes to those financial statements beginning on page F-1 of this annual report. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of factors including but not limited to those in Item 3.D. of this
annual report on Form 20-F.
Overview
The Group is a provider of a comprehensive range of network services
and systems integration mainly in Japan. IIJ was founded in December 1992 and began offering Internet connectivity services commercially
in July 1993. IIJ was one of the first commercial ISPs in Japan and has expanded the Group business to outsourcing services, WAN
services and systems integration along with the expansion of usage of Internet by customers.
Our primary sources of revenue are Internet connectivity services,
outsourcing services, WAN services, systems integration, equipment sales, and ATM operation business. Internet connectivity services
consist of Internet connectivity services for enterprise and Internet connectivity services for consumers. For WAN services, which
are mainly provided by IIJ-Global, we offer closed network services using connectivity such as Ethernet, IP-VPN and dedicated lines.
For outsourcing services, we provide services such as network security services, mail and web server hosting services, managed
router services, Internet data center services and cloud computing services such as IIJ GIO/Hosting Package. For systems integration,
we provide systems construction such as consulting, project planning, systems design and development of network systems to meet
each of our customers’ requirements and systems operation and maintenance. IIJ GIO/Component is provided as a part of systems
operation and maintenance. For equipment sales, we sell equipment as part of our provision of total network solutions.
We entered into the ATM operation business through our subsidiary,
Trust Networks, which was established in July 2007. Trust Networks operates ATMs and its network systems to provide ATM service
and receives a commission for each bank withdrawal transaction when a customer uses its serviced ATMs. As of March 31, 2016, 1,087
ATMs were in operation in places such as Japanese pachinko parlors.
Currently, we have two business segments: the network services
and systems integration business and the ATM operation business. Our network services and systems integration business is comprised
of Internet connectivity services, WAN services, outsourcing services, systems integration and equipment sales.
For the fiscal year ended March 31, 2016, net revenues of network
services and systems integration business and ATM operation business before elimination of intersegment revenues were ¥137.1
billion and ¥3.9 billion, respectively. Our consolidated net revenue for the fiscal year ended March 31, 2016 was ¥140.6
billion.
Most of our revenues are from customers operating in Japan.
We refer to our subsidiaries and equity method investees as our
group companies, and we have invested heavily in and exercise significant influence over these companies. For the fiscal year ended
March 31, 2016, we consolidated all of our 15 subsidiaries. In addition, we had eight equity method investees. For descriptions
and the history of our group companies, see “Our Group Companies” in Item 4.B.
For a discussion of factors affecting our future financial results,
see “Item 5.D. Trend Information.”
Results of Operations
As an aid to understanding our operating results, the following
tables show items from our statements of income for the periods indicated in millions of yen and as a percentage of total revenues.
For further discussion about segment reporting, please see “Segment Information” later in this section.
|
|
Fiscal
year ended March 31,
|
|
|
2014
|
|
2015
|
|
2016
|
|
|
(millions of yen except for percentage
data)
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet connectivity services (enterprise)
|
|
¥
|
16,585
|
|
|
|
14.5
|
%
|
|
¥
|
16,350
|
|
|
|
13.3
|
%
|
|
¥
|
17,597
|
|
|
|
12.5
|
%
|
Internet connectivity services (consumer)
|
|
|
6,025
|
|
|
|
5.3
|
|
|
|
8,222
|
|
|
|
6.7
|
|
|
|
15,256
|
|
|
|
10.9
|
|
WAN services
|
|
|
25,006
|
|
|
|
21.9
|
|
|
|
24,326
|
|
|
|
19.8
|
|
|
|
25,177
|
|
|
|
17.9
|
|
Outsourcing services
|
|
|
19,670
|
|
|
|
17.2
|
|
|
|
20,108
|
|
|
|
16.3
|
|
|
|
21,266
|
|
|
|
15.1
|
|
Total
|
|
|
67,286
|
|
|
|
58.9
|
|
|
|
69,006
|
|
|
|
56.1
|
|
|
|
79,296
|
|
|
|
56.4
|
|
Systems integration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems construction
|
|
|
18,673
|
|
|
|
16.3
|
|
|
|
20,437
|
|
|
|
16.6
|
|
|
|
21,145
|
|
|
|
15.0
|
|
Systems operation and maintenance
|
|
|
23,796
|
|
|
|
20.8
|
|
|
|
27,800
|
|
|
|
22.6
|
|
|
|
33,043
|
|
|
|
23.5
|
|
Total
|
|
|
42,469
|
|
|
|
37.1
|
|
|
|
48,237
|
|
|
|
39.2
|
|
|
|
54,188
|
|
|
|
38.5
|
|
Equipment sales
|
|
|
1,690
|
|
|
|
1.5
|
|
|
|
2,167
|
|
|
|
1.7
|
|
|
|
3,275
|
|
|
|
2.3
|
|
ATM operation business
|
|
|
2,827
|
|
|
|
2.5
|
|
|
|
3,640
|
|
|
|
3.0
|
|
|
|
3,889
|
|
|
|
2.8
|
|
Total revenues
|
|
|
114,272
|
|
|
|
100.0
|
|
|
|
123,050
|
|
|
|
100.0
|
|
|
|
140,648
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of network services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backbone cost
|
|
|
3,762
|
|
|
|
3.3
|
|
|
|
3,741
|
|
|
|
3.0
|
|
|
|
3,636
|
|
|
|
2.6
|
|
Local access line cost
|
|
|
22,469
|
|
|
|
19.7
|
|
|
|
21,860
|
|
|
|
17.8
|
|
|
|
22,913
|
|
|
|
16.3
|
|
Other connectivity cost
|
|
|
398
|
|
|
|
0.3
|
|
|
|
431
|
|
|
|
0.3
|
|
|
|
454
|
|
|
|
0.3
|
|
Depreciation and amortization
|
|
|
3,480
|
|
|
|
3.0
|
|
|
|
3,929
|
|
|
|
3.2
|
|
|
|
4,458
|
|
|
|
3.2
|
|
Other
|
|
|
22,937
|
|
|
|
20.1
|
|
|
|
24,971
|
|
|
|
20.3
|
|
|
|
32,778
|
|
|
|
23.3
|
|
Total cost of network services
|
|
|
53,046
|
|
|
|
46.4
|
|
|
|
54,932
|
|
|
|
44.6
|
|
|
|
64,239
|
|
|
|
45.7
|
|
Cost of systems integration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment sales related to
systems integration
|
|
|
7,529
|
|
|
|
6.6
|
|
|
|
9,240
|
|
|
|
7.5
|
|
|
|
7,919
|
|
|
|
5.6
|
|
Other
|
|
|
28,981
|
|
|
|
25.4
|
|
|
|
32,322
|
|
|
|
26.3
|
|
|
|
38,307
|
|
|
|
27.3
|
|
Total cost of systems integration
|
|
|
36,510
|
|
|
|
32.0
|
|
|
|
41,562
|
|
|
|
33.8
|
|
|
|
46,226
|
|
|
|
32.9
|
|
Cost of equipment sales
|
|
|
1,527
|
|
|
|
1.3
|
|
|
|
1,932
|
|
|
|
1.6
|
|
|
|
2,969
|
|
|
|
2.1
|
|
Cost of ATM operation business
|
|
|
2,123
|
|
|
|
1.9
|
|
|
|
2,552
|
|
|
|
2.1
|
|
|
|
2,559
|
|
|
|
1.8
|
|
Total costs
|
|
|
93,206
|
|
|
|
81.6
|
|
|
|
100,978
|
|
|
|
82.1
|
|
|
|
115,993
|
|
|
|
82.5
|
|
Sales and marketing
|
|
|
8,548
|
|
|
|
7.5
|
|
|
|
9,188
|
|
|
|
7.5
|
|
|
|
10,589
|
|
|
|
7.5
|
|
General and administrative
|
|
|
6,374
|
|
|
|
5.5
|
|
|
|
7,368
|
|
|
|
6.0
|
|
|
|
7,471
|
|
|
|
5.3
|
|
Research and development
|
|
|
421
|
|
|
|
0.4
|
|
|
|
441
|
|
|
|
0.3
|
|
|
|
455
|
|
|
|
0.3
|
|
Total costs and expenses
|
|
|
108,549
|
|
|
|
95.0
|
|
|
|
117,975
|
|
|
|
95.9
|
|
|
|
134,508
|
|
|
|
95.6
|
|
OPERATING INCOME
|
|
|
5,723
|
|
|
|
5.0
|
|
|
|
5,075
|
|
|
|
4.1
|
|
|
|
6,140
|
|
|
|
4.4
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
51
|
|
|
|
0.0
|
|
|
|
63
|
|
|
|
0.1
|
|
|
|
93
|
|
|
|
0.0
|
|
Interest income
|
|
|
27
|
|
|
|
0.0
|
|
|
|
23
|
|
|
|
0.0
|
|
|
|
28
|
|
|
|
0.0
|
|
Interest expense
|
|
|
(256
|
)
|
|
|
(0.2
|
)
|
|
|
(238
|
)
|
|
|
(0.2
|
)
|
|
|
(241
|
)
|
|
|
(0.0
|
)
|
Foreign exchange gain (loss), net
|
|
|
219
|
|
|
|
0.2
|
|
|
|
(5
|
)
|
|
|
(0.0
|
)
|
|
|
(71
|
)
|
|
|
(0.0
|
)
|
Net gain on sales of other investments
|
|
|
108
|
|
|
|
0.1
|
|
|
|
41
|
|
|
|
0.0
|
|
|
|
24
|
|
|
|
0.0
|
|
Net gain on other investments
|
|
|
313
|
|
|
|
0.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impairment of other investments
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
(0.0
|
)
|
|
|
(15
|
)
|
|
|
(0.0
|
)
|
Other—net
|
|
|
90
|
|
|
|
0.1
|
|
|
|
209
|
|
|
|
0.2
|
|
|
|
235
|
|
|
|
0.0
|
|
Other income (expenses) — net
|
|
|
552
|
|
|
|
0.5
|
|
|
|
64
|
|
|
|
0.1
|
|
|
|
53
|
|
|
|
0.0
|
|
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES—(FORWARD)
|
|
|
6,275
|
|
|
|
5.5
|
%
|
|
|
5,139
|
|
|
|
4.2
|
%
|
|
|
6,193
|
|
|
|
4.4
|
%
|
|
|
|
|
|
Fiscal
year ended March 31,
|
|
|
2014
|
|
2015
|
|
2016
|
|
|
(millions of yen except for percentage
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES—(FORWARD)
|
|
|
6,275
|
|
|
|
5.5
|
|
|
|
5,139
|
|
|
|
4.2
|
|
|
|
6,193
|
|
|
|
4.4
|
|
INCOME TAX EXPENSE
|
|
|
1,795
|
|
|
|
1.6
|
|
|
|
1,897
|
|
|
|
1.5
|
|
|
|
2,183
|
|
|
|
1.
5
|
|
EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES
|
|
|
204
|
|
|
|
0.2
|
|
|
|
155
|
|
|
|
0.1
|
|
|
|
180
|
|
|
|
0.1
|
|
NET INCOME
|
|
|
4,684
|
|
|
|
4.1
|
|
|
|
3,397
|
|
|
|
2.8
|
|
|
|
4,190
|
|
|
|
3.0
|
|
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
|
|
|
(242
|
)
|
|
|
(0.2
|
)
|
|
|
(75
|
)
|
|
|
(0.1
|
)
|
|
|
(152
|
)
|
|
|
(0.1
|
)
|
NET INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC.
|
|
¥
|
4,442
|
|
|
|
3.9
|
%
|
|
¥
|
3,322
|
|
|
|
2.7
|
%
|
|
¥
|
4,038
|
|
|
|
2.9
|
%
|
_________________
The Fiscal Year Ended March 31, 2016 Compared to
the Fiscal Year Ended March 31, 2015
Total revenues
Our total revenues were ¥140.6 billion for the fiscal year ended
March 31, 2016, an increase of 14.3% compared to ¥123.1 billion for the previous fiscal year mainly due to the increase
in the revenue for mobile services for consumers and the increase in system integration revenues.
Network Services revenues.
Revenues from network services, which comprise our Internet connectivity
services for enterprise, Internet connectivity services for consumers, WAN services and outsourcing services, increased by 14.9%
to ¥79.3 billion for the fiscal year ended March 31, 2016 from ¥69.0 billion for the previous fiscal year.
Internet connectivity services for enterprise.
Revenues for Internet connectivity services for enterprise depend on customers’ bandwidth usage, the number of contracts
and pricing for connectivity services. Revenues increased by 7.6% to ¥17.6 billion for the fiscal year ended March 31, 2016
from ¥16.4 billion for the previous fiscal year. IP connectivity service revenue decreased by 1.6% to ¥9.7 billion for
the fiscal year ended March 31, 2016 from ¥9.8 billion for the previous fiscal year because IP services revenue per contract
decreased while the total contracted bandwidth increased. Revenues for mobile services for enterprise increased by 45.7% to ¥4.6
billion for the fiscal year ended March 31, 2016 from ¥3.1 billion for the previous fiscal year. The increase was mainly because
of the increase in MVNE solution services revenues. The number of MVNE business clients continued to increase and their business
volume also expanded. The increase in mobile related services revenues covered the decrease in IP services revenues. Although
we do not expect prices of Internet connectivity services to increase significantly in the fiscal year ending March 31, 2017,
we anticipate that customer demand, especially network business operators’ demand, for broader IP bandwidth should contribute
to our revenue growth as the use of broader IP by corporate customers expands. We shall also focus on acquiring new customers
and contracts as well as increasing the bandwidth usage of existing customers by maintaining the quality of our services to differentiate
them from those of our competitors. We expect MVNE solution services to contribute to continuous growth of mobile services revenues
along with rapid MVNO market expansion.
Internet connectivity services for consumers.
Revenues for Internet connectivity services for consumers depend on the number of service contracts and pricing. For the fiscal
year ended March 31, 2016, revenues increased by 85.5% to ¥15.3 billion from ¥8.2 billion for the previous fiscal year.
For the fiscal year ended March 31, 2016, the revenues from hi-ho brand services decreased by 9.2% from the previous fiscal year,
while the revenues from IIJ brand services increased by 134.3% from the previous fiscal year. The increase was mainly due to the
increase in revenues from mobile services for consumers, in which we offer inexpensive data communication and voice services through
SIM cards. The increase due to mobile services for consumers covered the decrease in revenues from our network service by hi-ho.
Subscriptions to our mobile services for consumers were approximately 747 thousand as of March 31, 2016 as compared to approximately
430 thousand for the previous fiscal year end. For the fiscal year ending March 31, 2017, we anticipate mobile services for consumers
should continue to accumulate and contribute to the revenue growth.
WAN services.
The WAN services that
we offer are closed network services using connectivity such as Ethernet, IP-VPN and dedicated access lines, and are mainly provided
by IIJ-Global and IIJ. Revenues for WAN services depend on the number of contracted lines for WAN services and the customers’
bandwidth usage. For the fiscal year ended March 31, 2016, the revenues from WAN services increased by 3.5% to ¥25.2 billion
from ¥24.3 billion for the previous fiscal year as we continued to accumulate orders from enterprise customers. For the fiscal
year ending March 31, 2017, we expect to see similar revenue growth rates as compared to the fiscal year ended March 31, 2016.
Outsourcing services.
For outsourcing services,
we are currently offering security-related, network-related, server-related, and data center-related outsourcing services, as
well as cloud computing services, such as IIJ GIO/Hosting Package. Examples of our outsourcing services include, among others,
firewall services, email-related services, web hosting services, anti-Distributed Denial of Service (“DDoS”) attack
protection services, internet-VPN services and router rental services, which are provided mainly to our internet connectivity
customers. Our revenues depend on our ability to cross-sell our existing outsourcing services, add new features to existing outsourcing
services and introduce new services. For the fiscal year ended March 31, 2016, our outsourcing services revenues increased by
5.8% to ¥21.3 billion from ¥20.1 billion for the previous fiscal year. The increases in security-related services revenues
and overseas hosting services revenues contributed to the revenue growth. We anticipate that outsourcing services revenues should
continue to grow mainly due to increasing demands for security-related services for corporate customers.
Systems integration revenues
Generally speaking, while Japanese customers, especially blue-chip
companies, use ready-made network services to build their network systems, they also require customization to meet their individual
needs. To meet such needs, we believe that it is important as a total network solution provider to provide systems construction
together with network services. Therefore, we have been focusing on providing systems construction to our corporate customers.
Systems construction is mainly IP-related network construction such as VPN networks and IP-based server system construction such
as web server and email server systems. Systems construction can be largely affected by the economic situation, as corporations
usually reduce their ICT-related investments during economic down times unless such investments are deemed critical.
For the fiscal year ended March 31, 2016, our revenues from systems
integration, which include equipment sales related to systems integration, increased by 12.3% to ¥54.2 billion from ¥48.2
billion for the previous fiscal year. Systems construction revenue, a one-time revenue, increased by 3.5% compared to the previous
fiscal year. The increase was mainly due to an increase in systems construction projects and execution of several large-scale projects,
including one project with approximately ¥2 billion in revenue. Systems operation and maintenance revenue, a recurring
revenue, increased by 18.9% compared to the previous fiscal year. The increase was mainly because many of the accumulated systems
construction projects have been shifted to operation and maintenance. Also, the increase in “IIJ GIO Component Services”
revenues contributed to the revenue growth. Order backlog for systems construction and equipment sales as of March 31, 2016 was
¥6.1 billion, an increase of 28.4% compared to the previous fiscal year end. Order backlog for systems operation and maintenance
as of March 31, 2016 was ¥27.6 billion, an increase of 13.4% compared to the previous fiscal year end.
For the fiscal year ending March 31, 2017, systems construction
revenue is expected to increase from the previous fiscal year as corporate ICT-related investment steadily increases along with
stable Japanese economic situation. However, systems integration revenues can fluctuate significantly in accordance with the absence
or addition of large orders. For systems operation and maintenance revenues, a recurring type revenue, we anticipate we can increase
revenues compared to the fiscal year ended March 31, 2016 with the accumulation of contracts, including contracts for our cloud
computing services, as well as some of our construction projects migrating to the operation and maintenance phases.
Equipment sales revenues.
For equipment sales, we sell third-party equipment to meet the one-stop
needs of our customers. For the fiscal year ended March 31, 2016, equipment sales revenues increased by 51.1% to ¥3.3 billion
from ¥2.2 billion for the previous fiscal year. We saw an increase in revenues of equipment, especially portable devices and
similar products along with increasing needs for mobile services for both consumer and enterprise.
ATM Operation Business revenues.
Revenues from our ATM operation business were ¥3.9 billion for
the fiscal year ended March 31, 2016 compared to ¥3.6 billion for the previous fiscal year. Revenues increased mainly along
with the increase in the number of serviced ATMs. Trust Networks, our subsidiary which operates this business, receives a commission
for each bank withdrawal transaction when a customer uses its serviced ATMs. For the fiscal year ending March 31, 2017, we anticipate
ATM operation business revenues to increase gradually, as in the previous fiscal year, in line with the placement of additional
ATMs, despite the possibility that we may see a decrease in daily transactions due, for example, to a decrease in the number of
pachinko players due to a declining Japanese population and to a decrease in consumer demand prompted by an increase in the Japanese
consumption tax rate.
Total cost of revenues
Our total cost of revenues increased by 14.9% to ¥116.0 billion
for the fiscal year ended March 31, 2016 from ¥101.0 billion for the previous fiscal year.
Cost of network services
.
Cost of network
services increased by 16.9% to ¥ 64.2 billion for the fiscal year ended March 31, 2016 from ¥54.9 billion for
the previous fiscal year. Gross margin ratio for network services revenues, which is the ratio of (1) the amount obtained by subtracting
cost of network services from network services revenues to (2) network services revenues, decreased to 19.0% for the fiscal year
ended March 31, 2016 from 20.4% for the previous fiscal year. The decrease was mainly due to the increase in mobile connectivity
costs along with the increase in mobile-related services revenues, and the increase in depreciation and amortization cost along
with the expansion and upgrade of network facilities.
Cost of systems integration.
Cost of systems
integration increased by 11.2% to ¥46.2 billion for the fiscal year ended March 31, 2016 from ¥41.6 billion for
the previous fiscal year. Gross margin ratio for systems integration, which is the ratio of (1) the amount obtained by subtracting
cost of systems integration revenues from systems integration revenues to (2) systems integration revenues, increased to 14.7%
for the fiscal year ended March 31, 2016 from 13.8% for the previous fiscal year. The increase was mainly because the revenue growth
in systems operation and maintenance was greater than the increase in costs such as personnel-related and outsourcing-related.
Cost of equipment sales.
Cost of equipment
sales increased by 53.6% to ¥3.0 billion for the fiscal year ended March 31, 2016 from ¥1.9 billion for
the previous fiscal year. The increase was primarily due to the increase in equipment sales revenues. Gross margin ratio for equipment
sales, which is the ratio of (1) the amount obtained by subtracting cost of equipment sales from equipment sales revenues to (2)
equipment sales revenues, decreased to 9.4% for the fiscal year ended March 31, 2016 from 10.8% for the previous fiscal year.
Cost of ATM Operation Business.
Cost
of the ATM operation business was ¥2.6 billion for the fiscal year ended March 31, 2016 compared to ¥2.6 billion for the
previous fiscal year. Gross margin was ¥1.3 billion for the fiscal year ended March 31, 2016 compared to ¥1.1 billion for
the previous fiscal year. Gross margin ratio for ATM operation business revenues, which is the ratio of (1) the amount obtained
by subtracting cost of ATM operation business from ATM operation business revenues to (2) ATM operation business revenues, increased
to 34.2% for the fiscal year ended March 31, 2016 from 29.9% for the previous fiscal year. The cost of ATM operation business slightly
increased as we increased the number of serviced ATMs. As of March 31, 2016, 1,087 ATMs were in operation.
Total costs and expenses
Total costs and expenses, which includes total cost of revenues,
sales and marketing expenses, general and administrative expenses and research and development expenses, increased by 14.0% to
¥134.5 billion for the fiscal year ended March 31, 2016 from ¥118.0 billion for the previous fiscal year.
Sales and marketing.
Sales and marketing expenses
increased by 15.2% to ¥10.6 billion for the fiscal year ended March 31, 2016 from ¥9.2 billion for the previous
fiscal year. The increase was mainly due to the increase in sales commission expenses related to mobile services and personnel-related
expenses.
General and administrative.
General and administrative
expenses increased by 1.4% to ¥7.5 billion for the fiscal year ended March 31, 2016 from ¥7.4 billion for the
previous fiscal year. The increase was mainly due to the increase in personnel-related expenses.
Research and development.
Research
and development expenses increased by 3.1% to ¥0.5 billion for the fiscal year ended March 31, 2016 from ¥0.4 billion
for the previous fiscal year.
Operating income
As a result of the foregoing factors, operating income increased
by 21.0% to ¥6.1 billion for the fiscal year ended March 31, 2016 from ¥5.1 billion for the previous fiscal year.
The increase was mainly because of the increase in the gross margin of both systems integration and network services which absorbed
the increase in sales and marketing expenses and general and administrative expenses.
Other income (expenses)-net
Other income-net of ¥53 million was recorded for the fiscal
year ended March 31, 2016, compared to other income-net of ¥64 million for the previous fiscal year.
Dividend income.
Dividend income was
¥93 million for the fiscal year ended March 31, 2016 compared to ¥63 million for the previous fiscal year.
Interest income.
Interest income was
¥28 million for the fiscal year ended March 31, 2016 compared to ¥23 million for the previous fiscal year.
Interest expense.
Interest expense,
comprising interest expense related to borrowings and capital lease obligations, amounted to ¥241 million for the fiscal
year ended March 31, 2016 compared to ¥238 million for the previous fiscal year.
Foreign exchange gain (loss), net.
Net
foreign exchange loss amounted to ¥71 million for the fiscal year ended March 31, 2016 compared to the loss of ¥5 million
for the previous fiscal year. Foreign exchange loss was mainly the result of the Japanese yen becoming stronger against foreign
currencies including the U.S. dollar in the year ended March 31, 2016.
Net gain on sales of other investments.
For the fiscal year ended March 31, 2016, we recorded net gain on sales of other investments of ¥24 million compared to
net gain of ¥41 million for the previous fiscal year.
Impairment of other investments.
For
the fiscal year ended March 31, 2016, we recorded ¥15 million impairment loss on other investments compared to the loss of
¥29 million for the previous fiscal year.
Other-net.
For the fiscal years ended March
31, 2015 and 2016, we recorded other income of ¥209 million and ¥235 million, respectively.
Income from operations before
income tax expense and equity in net income of equity method investees
We recorded income from operations before income tax expense and
equity in net income of equity method investees of ¥6.2 billion for the fiscal year ended March 31, 2016 compared to ¥5.1
billion for the previous fiscal year. The increase primarily reflects the increase in operating income.
Income tax expense
For the fiscal year ended March 31, 2016, we recorded an income
tax expense of ¥2.2 billion compared to income tax expense of ¥1.9 billion for the previous fiscal year. The increase was
mainly due to the increase in income from operations before income tax expense and equity in net income of equity method investees.
Equity in net income of equity
method investees
Equity in net income of equity method investees was ¥180 million
for the fiscal year ended March 31, 2016 compared to ¥155 million for the previous fiscal year, mainly due to income of Multifeed.
Net income attributable to noncontrolling
interests
Net income attributable to noncontrolling interests was ¥152
million for the fiscal year ended March 31, 2016 mainly related to Trust Networks compared to ¥75 million for the previous
fiscal year.
Net income attributable to IIJ
Net income attributable to IIJ for the fiscal year ended March 31,
2016 was ¥4.0 billion compared to ¥3.3 billion for the previous fiscal year. The increase primarily reflects the increase
in operating income.
The Fiscal Year Ended March 31, 2015 Compared
to the Fiscal Year Ended March 31, 2014
Total revenues
Our total revenues were ¥123.1 billion for the fiscal year ended
March 31, 2015, an increase of 7.7% compared to ¥114.3 billion for the previous fiscal year mainly due to the increase in the
revenue for our LTE mobile data communications services for consumers and the increase in the scale of systems construction projects.
Network Services revenues.
Revenues from network services, which comprise our Internet connectivity
services for enterprise, Internet connectivity services for consumers, WAN services and outsourcing services, increased by 2.6%
to ¥69.0 billion for the fiscal year ended March 31, 2015 from ¥67.3 billion for the previous fiscal year.
Internet connectivity services for enterprise.
Revenues for Internet connectivity services for enterprise depend on customers’ bandwidth usage, the number of contracts
and pricing for connectivity services. Revenues decreased by 1.4% to ¥16.4 billion for the fiscal year ended March 31, 2015
from ¥16.6 billion for the previous fiscal year. IP connectivity service revenue decreased by 5.1% to ¥9.8 billion for
the fiscal year ended March 31, 2015 from ¥10.4 billion for the previous fiscal year. Revenues for mobile services for enterprise
increased by 10.3% to ¥3.1 billion for the fiscal year ended March 31, 2015 from ¥2.9 billion for the previous fiscal
year. Revenues from our Internet connectivity services for enterprise were weaker than expected mainly because IP services revenue
per contract decreased while the total contracted bandwidth increased.
Internet connectivity services for consumers.
Revenues for Internet connectivity services for consumers depend on the number of each service contracts and pricing. For
the fiscal year ended March 31, 2015, revenues increased by 36.5% to ¥8.2 billion from ¥6.0 billion for the previous fiscal
year. For the fiscal year ended March 31, 2015, the revenues from hi-ho brand services decreased by 8.3% from the previous fiscal
year, while the revenues from IIJ brand services increased by 110.3% from the previous fiscal year. The increase was mainly because
of the increase in revenues from LTE mobile data communications services for consumers, in which we offer inexpensive data communication
and voice services through SIM cards. The increase due to LTE mobile data communications services for consumers covered the decrease
in revenues from our network service by hi-ho. Subscriptions to our LTE mobile data communication services were approximately
430 thousand as of March 31, 2015 as compared to approximately 169 thousand for the previous fiscal year end.
WAN services.
The WAN services that we offer
are closed network services using connectivity such as Ethernet, IP-VPN and dedicated access lines, and are mainly provided by
IIJ-Global and IIJ. Revenues for WAN services depend on the number of contracted lines for WAN services and the customers’
bandwidth usage. For the fiscal year ended March 31, 2015, the revenues from WAN services decreased by 2.7% to ¥24.3 billion
from ¥25.0 billion for the previous fiscal year.
Outsourcing services.
For outsourcing services,
we are currently offering security-related, network-related, server-related, and data center-related outsourcing services, as
well as cloud computing services, such as IIJ GIO/Hosting Package. Examples of our outsourcing services include, among others,
firewall services, email-related services, web hosting services, anti-Distributed Denial of Service (“DDoS”) attack
protection services, internet-VPN services and router rental services, which are provided mainly to our internet connectivity
customers. Our revenues depend on our ability to cross-sell our existing outsourcing services, add new features to existing outsourcing
services and introduce new services. For the fiscal year ended March 31, 2015, our outsourcing services revenues increased by
2.2% to ¥20.1 billion from ¥19.7 billion for the previous fiscal year. Revenues were weaker than expected mainly because
we had a termination of a large-scale overseas data center contract for a game customer and the cloud computing revenue from large
game customers did not increase as much as we anticipated.
Systems integration revenues.
Generally speaking, while Japanese customers, especially blue-chip
companies, use ready-made network services to build their network systems, they also require customization to meet their individual
needs. To meet such needs, we believe that it is important as a total network solution provider to provide systems construction
together with network services. Therefore, we have been focusing on providing systems construction to our corporate customers.
Systems construction is mainly IP-related network construction such as VPN network and IP-based server system construction such
as web server and email server systems. Systems construction can be largely affected by the economic situation, as corporations
usually reduce their IT-related investments during economic down times unless such investments are deemed critical.
For the fiscal year ended March 31, 2015, our revenues from systems
integration, which include equipment sales related to systems integration, increased by 13.6% to ¥48.2 billion from ¥42.5
billion for the previous fiscal year. The increase was mainly due to the increase in the scale of systems construction projects.
Systems construction revenue, a one-time revenue, increased by 9.4% compared to the previous fiscal year. Systems operation and
maintenance revenue, a recurring revenue, increased by 16.8% compared to the previous fiscal year. “IIJ GIO Component Services”
revenues increased and systems construction projects that were completed and shifted to operation and maintenance phase contributed
to an increase in systems operation and maintenance revenues. Order backlog for systems construction and equipment sales as of
March 31, 2015 was ¥4.7 billion, a decrease of 7.2% compared to the previous fiscal year end. Order backlog for systems operation
and maintenance as of March 31, 2015 was ¥24.3 billion, an increase of 26.6% compared to the previous fiscal year end.
Equipment sales revenues.
For equipment sales, we sell third-party equipment to meet the one-stop
needs of our customers. For the fiscal year ended March 31, 2015, equipment sales revenues increased by 28.2% to ¥2.2 billion
from ¥1.7 billion for the previous fiscal year. We saw an increase in revenues of equipment such as portable devices and similar
products along with increasing needs for mobile data communications services for both consumer and enterprise.
ATM Operation Business revenues.
Revenues from our ATM operation business were ¥3.6 billion for
the fiscal year ended March 31, 2015 compared to ¥2.8 billion for the previous fiscal year. Revenues increased mainly along
with the increase in the number of serviced ATMs. Trust Networks, our subsidiary which operates this business, receives a commission
for each bank withdrawal transaction when a customer uses its serviced ATMs.
Total cost of revenues
Our total cost of revenues increased by 8.3% to ¥101.0 billion
for the fiscal year ended March 31, 2015 from ¥93.2 billion for the previous fiscal year.
Cost of network services
.
Cost of network
services increased by 3.6% to ¥ 54.9 billion for the fiscal year ended March 31, 2015 from ¥53.0 billion for the previous
fiscal year. Gross margin ratio for network services revenues, which is the ratio of (1) the amount obtained by subtracting cost
of network services from network services revenues to (2) network services revenues, decreased to 20.4% for the fiscal year ended
March 31, 2015 from 21.2% for the previous fiscal year. The decrease was mainly due to the increase in mobile connectivity costs
along with the increase in mobile-related services revenues, and the increase in depreciation and amortization cost along with
the expansion and upgrade of network facilities.
Cost of systems integration.
Cost of systems
integration increased by 13.8% to ¥41.6 billion for the fiscal year ended March 31, 2015 from ¥36.5 billion for the previous
fiscal year. Gross margin ratio for systems integration, which is the ratio of (1) the amount obtained by subtracting cost of systems
integration revenues from systems integration revenues to (2) systems integration revenues, decreased to 13.8% for the fiscal year
ended March 31, 2015 from 14.0% for the previous fiscal year. The decrease was mainly due to the increase in personnel-related
costs and outsourcing-related costs along with the revenue growth and solution development, increase in purchasing costs along
with the systems construction revenue growth, and the increase in depreciation and amortization costs was due to the expansion
of service facility such as for our cloud computing services.
Cost of equipment sales
.
Cost of equipment
sales increased by 26.6% to ¥1.9 billion for the fiscal year ended March 31, 2015 from ¥1.5 billion for the previous fiscal
year. The increase was primarily due to the increase in equipment sales revenues. Gross margin ratio for equipment sales, which
is the ratio of (1) the amount obtained by subtracting cost of equipment sales from equipment sales revenues to (2) equipment sales
revenues, increased to 10.8% for the fiscal year ended March 31, 2015 from 9.7% for the previous fiscal year.
Cost of ATM Operation Business.
Cost of the
ATM operation business was ¥2.6 billion for the fiscal year ended March 31, 2015 compared to ¥2.1 billion for the previous
fiscal year. Gross margin was ¥1.1 billion for the fiscal year ended March 31, 2015 compared to ¥0.7 billion for the previous
fiscal year. Gross margin ratio for ATM operation business revenues, which is the ratio of (1) the amount obtained by subtracting
cost of ATM operation business from ATM operation business revenues to (2) ATM operation business revenues, increased to 29.9%
for the fiscal year ended March 31, 2015 from 24.9% for the previous fiscal year. The cost of ATM operation business increased
as we increased the number of serviced ATMs. As of March 31, 2015, 1,059 ATMs were in operation.
Total costs and expenses
Total costs and expenses, which includes total cost of revenues,
sales and marketing expenses, general and administrative expenses and research and development expenses, increased by 8.7% to ¥118.0
billion for the fiscal year ended March 31, 2015 from ¥108.5 billion for the previous fiscal year.
Sales and marketing.
Sales and marketing expenses
increased by 7.5% to ¥9.2 billion for the fiscal year ended March 31, 2015 from ¥8.5 billion for the previous fiscal year.
The increase was mainly due to the increase in personnel-related expenses and sales commission expenses.
General and administrative.
General and administrative
expenses increased by 15.6% to ¥7.4 billion for the fiscal year ended March 31, 2015 from ¥6.4 billion for the previous
fiscal year. The increase was mainly due to the expense related to the headquarter relocation and an increase in personnel-related
expenses.
Research and development.
Research and development
expenses increased by 4.7% to ¥441 million for the fiscal year ended March 31, 2015 from ¥421 million for the previous
fiscal year.
Operating income
As a result of the foregoing factors, operating income decreased
by 11.3% to ¥ 5.1 billion for the fiscal year ended March 31, 2015 from ¥5.7 billion for the previous fiscal year. The
decrease was mainly because of the decrease in the gross margin of both network services and systems integration and as well as
an increase in sales and marketing expenses and general and administrative expenses.
Other income (expenses)-net
Other income-net of ¥64 million was recorded for the fiscal
year ended March 31, 2015, compared to other income-net of ¥552 million for the previous fiscal year.
Dividend income.
Dividend income was ¥63
million for the fiscal year ended March 31, 2015 compared to ¥51 million for the previous fiscal year.
Interest income.
Interest income was ¥23
million for the fiscal year ended March 31, 2015 compared to ¥27 million for the previous fiscal year.
Interest expense.
Interest expense,
comprising interest expense related to borrowings and capital lease obligations, amounted to ¥238 million for the fiscal year
ended March 31, 2015 compared to ¥256 million for the previous fiscal year.
Foreign exchange gain (loss), net.
Net foreign
exchange loss amounted to ¥5 million for the fiscal year ended March 31, 2015 compared to the gain of ¥219 million for
the previous fiscal year. Foreign exchange loss was mainly the result of the Japanese yen becoming weaker against foreign currencies
including the U.S. dollar in the year ended March 31, 2015.
Net gain on sales of other investments.
For the fiscal year ended March 31, 2015, we recorded net gain on sales of other investments of ¥41 million compared to
net gain of ¥108 million for the previous fiscal year.
Net gain on other investments
.
For the fiscal
year ended March 31, 2015, we recorded no net gain or loss on other investments compared to net gain of ¥313 million for the
previous fiscal year.
Impairment of other investments.
For
the fiscal year ended March 31, 2015, we recorded ¥29 million impairment loss on other investments compared to no impairment
loss for the previous fiscal year.
Other-net.
For the fiscal years ended
March 31, 2014 and 2015, we recorded other income of ¥90 million and ¥209 million, respectively.
Income from operations before
income tax expense and equity in net income of equity method investees
We recorded income from operations before income tax expense and
equity in net income of equity method investees of ¥5.1 billion for the fiscal year ended March 31, 2015 compared to ¥6.3
billion for the previous fiscal year. The decrease primarily reflects the decrease in operating income.
Income tax expense
For the fiscal year ended March 31, 2015, we recorded an income
tax expense of ¥1.9 billion compared to income tax expense of ¥1.8 billion for the previous fiscal year. The increase was
mainly due to the decrease in deferred income tax benefit mainly related to Trust Networks.
Equity in net income of equity
method investees
Equity in net income of equity method investees was ¥155 million
for the fiscal year ended March 31, 2015 compared to ¥204 million for the previous fiscal year, mainly due to income of i-revo
and Multifeed.
Net income attributable to noncontrolling
interests
Net income attributable to noncontrolling interests was ¥75
million for the fiscal year ended March 31, 2015 mainly related to Trust Networks compared to ¥242 million for the previous
fiscal year.
Net income attributable to IIJ
Net income attributable to IIJ for the fiscal year ended March 31,
2015 was ¥3.3 billion compared to ¥4.4 billion for the previous fiscal year. The decrease primarily reflects the decrease
in operating income of ¥0.6 billion compared to the previous fiscal year.
Segment Reporting
Currently, we have two business segments: a network services and
systems integration business segment and an ATM operation business segment. The network services and systems integration business
segment is comprised of Internet connectivity services, WAN services, outsourcing services, systems integration and equipment sales.
The following table presents net revenues and operating income for
the fiscal years ended March 31, 2014, 2015 and 2016, respectively, by segment.
Business Segment Summary:
|
|
Fiscal
year ended March 31,
|
|
|
2014
|
|
2015
|
|
2016
|
|
|
(millions of yen)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services and systems integration business
|
|
¥
|
111,901
|
|
|
¥
|
119,819
|
|
|
¥
|
137,142
|
|
ATM operation business
|
|
|
2,827
|
|
|
|
3,640
|
|
|
|
3,889
|
|
Elimination
|
|
|
456
|
|
|
|
409
|
|
|
|
383
|
|
Total
|
|
|
114,272
|
|
|
|
123,050
|
|
|
|
140,648
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services and systems integration business
|
|
|
5,275
|
|
|
|
4,335
|
|
|
|
5,128
|
|
ATM operation business
|
|
|
578
|
|
|
|
886
|
|
|
|
1,149
|
|
Elimination
|
|
|
130
|
|
|
|
146
|
|
|
|
137
|
|
Total
|
|
¥
|
5,723
|
|
|
¥
|
5,075
|
|
|
¥
|
6,140
|
|
Year Ended March 31, 2016
Compared to the Year Ended March 31, 2015
Network services and Systems Integration Business
Segment
Net revenues from our network services and systems integration business
segment, before elimination of intersegment revenues, increased by 14.5% to ¥137.1 billion for the fiscal year ended March
31, 2016 compared to ¥119.8 billion for the previous fiscal year. The increase in revenues was mainly due to the increase in
mobile-related services both for enterprise and consumers and systems integration and outsourcing services. Operating costs and
expenses of our network services and systems integration business for the fiscal year ended March 31, 2016 increased by 14.3% to
¥132.0 billion compared to ¥115.5 billion for the previous fiscal year, mainly due to the increases in costs of network
services and systems integration, and sales and marketing expenses. As a result, operating income of our network services and systems
integration business for the fiscal year ended March 31, 2016 increased to ¥5.1 billion compared to ¥4.3 billion for the
previous fiscal year.
ATM Operation Business Segment
Net revenues from our ATM operation business segment, before elimination of intersegment revenues, increased
by 6.8% to
¥3.9 billion for the fiscal year ended March 31, 2016 compared to ¥3.6 billion
for the previous fiscal year. Operating expense of our ATM operation business for the fiscal year ended March 31, 2016 was ¥2.7
billion compared to ¥2.8 billion for the previous fiscal year. As a result, operating income of our ATM operation business
for the fiscal year ended March 31, 2016 was ¥1.1 billion compared to operating income of ¥0.9 billion for the previous
fiscal year.
Year Ended March 31, 2015
Compared to the Year Ended March 31, 2014
Network services and Systems Integration Business
Segment
Net revenues from our network services and systems integration business
segment, before elimination of intersegment revenues, increased by 7.1% to ¥119.8 billion for the fiscal year ended March 31,
2015 compared to ¥111.9 billion for the previous fiscal year. The increase in revenues was mainly due to the increase in systems
integration revenue, cloud computing services, and mobile-related services both for enterprise and consumers. Operating costs and
expenses of our network services and systems integration business for the fiscal year ended March 31, 2015 increased by 8.3% to
¥115.5 billion compared to ¥106.6 billion for the previous fiscal year, mainly due to the increases in costs of network
services and systems integration, and general and administrative expenses. As a result, operating income of our network services
and systems integration business for the fiscal year ended March 31, 2015 decreased to ¥4.3 billion compared to ¥5.3 billion
for the previous fiscal year.
ATM Operation Business Segment
Net revenues from our ATM operation business segment, before elimination
of intersegment revenues, increased by 28.8% to ¥3.6 billion for the fiscal year ended March 31, 2015 compared to ¥2.8
billion for the previous fiscal year. Operating expense of our ATM operation business for the fiscal year ended March 31, 2015
was ¥2.8 billion compared to ¥2.2 billion for the previous fiscal year. As a result, operating income of our ATM operation
business for the fiscal year ended March 31, 2015 was ¥0.9 billion compared to operating income of ¥0.6 billion for the
previous fiscal year.
Application of Critical Accounting
Policies
In reviewing our financial statements, you should consider the
sensitivity of our reported financial condition and results of operations to changes in the conditions and assumptions underlying
the estimates and judgments made by our management in applying critical accounting policies.
The preparation of financial statements requires the use of estimates,
judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the periods presented. Actual results may differ from these estimates, judgments
and assumptions. Note 1 to our consolidated financial statements includes a summary of the significant accounting policies used
in the preparation of our financial statements. Certain accounting policies are particularly critical because of their significance
to our reported results and because of the possibility that future events may differ significantly from the conditions and assumptions
underlying the estimates used and judgments made by our management in preparing our financial statements.
The Company has discussed the development and selection of critical
accounting policies and estimates with our Disclosure Committee, and the Disclosure Committee has reviewed the disclosure relating
to these, which are included in this “Operating and Financial Review and Prospects.” For all of these policies, we
caution that future events rarely develop exactly as forecast, and even the best estimates may require adjustment.
Revenue recognition
Network service revenues consist of Internet connectivity services,
WAN services and outsourcing services.
Revenues from Internet connectivity services consist of
Internet connectivity services for enterprise and Internet connectivity for consumers. Internet connectivity services for
enterprise represent dedicated Internet access type services, such as IP service and Data Center Connectivity service,
broadband Internet connectivity services that use fiber optic and ADSL access, such as IIJ FiberAccess/F Service and IIJ
DSL/F Service and wireless broadband Internet connectivity services, such as IIJ Mobile Service. Internet connectivity
services for consumers are provided under IIJ brands such as IIJmio, hi-ho brand and others, and consist of dial-up services,
optical based or ADSL based broadband services and wireless broadband internet connectivity services. WAN services are closed
network services for enterprise customers which mainly use dedicated lines. Outsourcing service revenues consist principally
of sales of various Internet access-related services such as security-related services, network related services, server
related services, data center related services, cloud computing services and others.
The term of these contracts is generally one month or one year.
All of these services are billed and recognized monthly on a straight-line basis. Initial setup fees received in connection with
network services are deferred and recognized over the estimated average period of the subscription for each service.
System integration revenue involves one or more of the following deliverables:
|
·
|
System construction services ― include all or some of the following elements depending on arrangements to meet each of
our customer's requirements: consulting, project planning, system design, and development of network systems. These services also
include the installation of software as well as configuration and installation of hardware.
|
|
·
|
Software ― we resell third-party software such as Oracle and Windows to our customers, which are installed by us during
the system development process.
|
|
·
|
Hardware ― we also resell third-party hardware, primarily servers, switches and routers, which we install during the
system development process. The hardware is generic hardware that is often sold by third party manufacturers and resellers.
|
|
·
|
Monitoring and operating service ― we monitor our customer's network activity and internet connectivity to detect and
report problems. We also provide constant data backup services.
|
|
·
|
Hardware and software maintenance service ―we repair or replace any malfunctioning parts of hardware. We examine software
faults and provide suitable solutions to customers.
|
The system construction services are generally delivered over a
three-month period. All hardware and software are delivered and installed during this period. Customers are required to pay a specified
fixed fee that is not payable until after the system construction has been completed and accepted by our customers.
Monitoring, operating and hardware and software maintenance services
generally commence once our customers have accepted the systems, and contract periods are generally from one to five years. Our
contracts include a stated annual fee for these services.
For multiple-element arrangements that include system construction
service, hardware, software essential to the hardware product’s functionality and undelivered non-software services (e.g.,
monitoring and operating services), the Company allocates revenue to all deliverables based on their relative selling prices. The
Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific
objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii)
best estimate of the selling price (“ESP”). The allocation of revenue is based mainly on the Company’s ESPs except
for certain undelivered non-software services for which VSOE has been established. The Company’s process for determining
its ESP for deliverables includes various factors that may vary depending on the circumstances and specific characteristics related
to each deliverable. In developing the ESP, the Company considers customer demand, the existence and effect of competitors, general
profit margin realized in the marketplace, volume of the transactions, the Company’s internal costs of providing the deliverables,
the profit objectives including targeted and historical margins realized on similar sales to similar customers and the historical
pricing practices.
The method used to account for each unit and the period over which
each unit of accounting is recognized are as follows:
|
·
|
Revenue allocated to system construction services is accounted for using contract accounting. System construction service revenues,
which are generally completed within three months, are recognized based on the completed-contract method in compliance with Accounting
Standards Codification (“ASC”) 605-35-25-92 because the Company is unable to bill customers and the title to the constructed
network system is not transferred to the customers unless they are satisfied with and accept the completed systems.
|
|
·
|
Revenue related to the hardware and software essential to the hardware product’s functionality is not recognized until
customer acceptance is received because title to the hardware and software do not transfer to our customers until formal acceptance
is received.
|
|
·
|
Revenue related to undelivered non-software services (monitoring, operating and hardware maintenance services) is recognized
on a straight-line basis over the contract period.
|
The Company also enters into multiple-element arrangements for system
integration services that include software not essential to the hardware product’s functionality and software-related services
and account for them in accordance with ASC 985-605, “Software-Revenue Recognition”. The Company has been able to establish
VSOE of fair value of the software-related services based on separate renewal contracts of the services that are consistently priced
within a narrow range. The Company allocates revenue to such services based on VSOE and recognizes the revenues on a straight-line
basis over the contract period. The Company allocates the residual amount to the software.
Equipment sales revenues are recognized when equipment is delivered and accepted
by the customer.
The Company evaluates whether it is appropriate to record the gross
amount of revenues and related costs or the net amount earned in reporting system construction services and equipment sales, depending
on whether the Company functions as principal or agent.
ATM operation business revenues consist primarily of commissions
for each withdrawing transaction with the use of ATMs. ATM commission collected from each withdrawal is aggregated every month
and recognized as ATM operation revenues.
Revenue is recognized net of consumption tax collected from customers
and subsequently remitted to governmental authorities.
Useful lives of property and
equipment
Property and equipment, net recorded on our balance sheet was ¥34.3
billion at March 31, 2016, representing 29.1% of our total assets. Property and equipment are recorded at cost. Depreciation and
amortization of property and equipment, including capitalized software and capital leases, are computed principally using the straight-line
method based on either the estimated useful lives of assets or the lease period, whichever is shorter. Our depreciation and amortization
expenses for property and equipment for the fiscal years ended March 31, 2014, 2015 and 2016 were ¥8.4 billion, ¥9.3 billion
and ¥9.5 billion, respectively.
We estimate the useful lives of property and equipment in order
to determine the amount of depreciation and amortization expense to be recorded in each fiscal year. We determine the useful lives
of our assets at the time the assets are acquired and base our determinations on expected use, experience with similar assets,
established laws and regulations as well as taking into account anticipated technological or other changes. Estimated useful lives
by major asset classes at March 31, 2016, were as follows:
Item
|
|
|
Range of useful lives
|
Data communications, office and other equipment
|
|
|
2 to 20 years
|
|
Buildings
|
|
|
20 years
|
|
Leasehold improvements
|
|
|
4 to 20 years
|
|
Capitalized software
|
|
|
5 to 7 years
|
|
Capital leases
|
|
|
4 to 6 years
|
|
If technological or other changes were to occur more rapidly or
in a different form than anticipated or new laws or regulations are enacted or the intended use changes, the useful lives assigned
to these assets may need to be shortened, or we may need to sell or write off the assets, resulting in recognition of increased
depreciation and amortization or losses in future periods. Our losses on disposal of property and equipment for the fiscal years
ended March 31, 2014, 2015, and 2016 were ¥83 million, ¥101 million and ¥66 million, respectively.
A one-year change in the useful life of these assets would have
increased or decreased depreciation expense by approximately ¥5.1 billion and ¥3.1 billion, respectively.
Ordinary maintenance and repairs are charged to income as incurred.
Major replacements and improvements are capitalized. When properties are retired or otherwise disposed of, the property and related
accumulated depreciation accounts are relieved of the applicable amounts and any differences are included in operating cost and
expenses.
Goodwill and intangible assets
Goodwill and intangible assets that are deemed to have indefinite
useful lives are not amortized, but are subject to impairment testing. Impairment testing is performed annually or more frequently
if events or changes in circumstances indicate that the asset might be impaired. The Company performs annual impairment tests on
March 31. If the carrying amount of a reporting unit exceeds its fair value, the Company then performs the second step of the goodwill
impairment test to measure the amount of impairment loss, if any.
No impairment of goodwill was recognized during the years ended
March 31, 2014, 2015 and 2016.
The Company recorded ¥11 million of loss on impairment of the
trademark right related to hi-ho in “Sales and marketing” expenses in the Company’s consolidated statement of
income for the year ended March 31, 2016. Because of the recent decrease in revenues of hi-ho, the Company recognized that the
trademark might be impaired. The carrying value of the trademark exceeded its fair value and the impairment loss was recognized
in an amount equal to the excess of the carrying amount of the trademark over the fair value of the trademark. The fair value of
the trademark was calculated using the relief-from-royalty method. The amount of loss was included in the network service and system
integration business segment.
Intangible assets with finite useful lives, consisting of customer
relationships, are amortized using a non-straight-line basis based on the pattern of expected future economic benefit over the
estimated useful lives, which range from 7 to 19 years. We estimate the useful lives of the intangible assets, considering the
customer attrition rate related to the customer relationships, results of contract update, new technology or economic situation.
If the attrition rate increases beyond expectation or rapid technological advances render the existing technology obsolete, we
may need to re-evaluate the remaining useful lives, or recognize impairment losses on the customer relationships.
On December 1, 2014, IIJ acquired a new subsidiary, RYUKOSHA and
recorded goodwill of ¥200 million. The goodwill components were mainly attributable to human resources and the goodwill was
included in the network service and system integration business segment.
Impairment of long-lived assets
Long-lived assets consist principally of property and equipment,
including those items leased under capital leases and amortized intangible assets. We perform an impairment review for our long-lived
assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. This
analysis is separate from our analysis of the useful lives of our assets, but it is affected by some similar factors. Factors that
we consider important which could trigger an impairment review include, but are not limited to, the impact of the following trends
or conditions:
|
·
|
significant decline in the market value of an asset,
|
|
·
|
current period operating cash flow loss,
|
|
·
|
introduction of competing technologies or services,
|
|
·
|
significant underperformance of expected or historical cash flows,
|
|
·
|
significant or continuing decline in subscribers,
|
|
·
|
changes in the manner or use of an asset,
|
|
·
|
disruptions in the use of network equipment under capital lease arrangements, and
|
|
·
|
other negative industry or economic trends.
|
When we determine that the carrying amount of specific assets may
not be recoverable based on the existence or occurrence of one or more of the above or other factors, we estimate the future cash
inflows and outflows expected to be generated by the assets over their expected useful lives. We estimate the sum of expected undiscounted
future cash flows based upon historical trends adjusted to reflect our best estimate of future market and operating conditions.
If the sum of the expected undiscounted future net cash flows is less than the carrying value of the assets, we record an impairment
loss based on the fair values of the assets. Such fair values may be based on established markets, independent appraisals and valuations
or discounted cash flows. If actual market and operating conditions under which assets are used are less favorable or shorter than
those projected by management, resulting in reduced cash flows, additional impairment for assets may be required.
Allowance for doubtful accounts
and uncollectible contractual prepayments
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. As of March 31, 2015 and 2016, we maintained allowances
for doubtful accounts of ¥148 million and ¥152 million, respectively. Management specifically analyzes accounts and loans
receivable including historical bad debts, customer concentrations, customer credit-worthiness and current economic trends when
evaluating the adequacy of the allowances for doubtful accounts. If the financial condition of our customers or debtors were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Deferred tax assets
We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. As of March 31, 2016, we had tax operating loss carryforwards not subject
to consolidation tax filing of ¥2,924 million, and tax operating loss carryforwards related to enterprise tax and inhabitant
tax subject to consolidation tax filing of ¥253 million and ¥19 million, respectively. The tax operating loss carryforwards
are available to offset future taxable income and will expire as shown in Note 12 of our consolidated financial statements. While
we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, if there are changes in circumstances that causes a change in judgment about the realizability of the related
deferred tax asset in future years, a release of or an increase in valuation allowance against deferred tax assets related to tax
operating loss carryforwards and other temporary differences would result in the decrease or increase in deferred tax expense.
Valuation of investments
We have investments in securities, and the valuation of such investments
and funds requires us to make judgments using information that is generally uncertain at the time, such as assumptions regarding
future financial conditions and cash flows. As of March 31, 2016, we had available-for-sale securities of ¥3.9 billion and
cost method investments of ¥2.0 billion.
We review the fair value of available
-for-sale securities on a regular basis
to determine if the fair value of any individual security has declined below its cost and if such decline is other-than-temporary.
If the decline in value is judged to be other-than-temporary, the cost basis of the investment is written down to fair value. Other-than-temporary
declines in value are determined taking into consideration the extent of decline in fair value, the length of time that the decline
in fair value below cost has existed, the financial condition and near-term prospects of the issuer and IIJ’s intent and
ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value and events
that might accelerate the recognition of impairment. For debt securities for which the declines are deemed to be other-than-temporary
and there is no intent to sell and it is not more likely than not that we will be required to sell the securities before the recovery
of the amortized cost basis, impairments are separated into the amount related to credit loss, which is recognized in earnings,
and the amount related to all other factors, which is recognized in other comprehensive income (loss). For debt securities for
which the declines are deemed to be other-than-temporary and there is an intent to sell or it is more likely than not that we will
be required to sell the securities before the recovery of the amortized cost basis, impairments in their entirety are recognized
in earnings. For equity securities for which the declines are deemed to be other-than-temporary, the resulting realized loss is
recognized in earnings in the period in which the decline is deemed to be other-than-temporary.
Non-marketable equity securities are carried at cost as fair value
is not readily determinable. When we evaluate whether non-marketable equity securities are impaired or not, we evaluate first whether
an event or change in circumstances has occurred in the period that may have significant adverse effect on the fair value of the
securities (an impairment indicator). We use such impairment indicators as follows:
|
·
|
A significant deterioration in the earnings performance or business prospects of the investee.
|
|
·
|
A significant adverse change in the regulatory, economic, or technological environment of the investee.
|
|
·
|
A significant adverse change in the general market condition of either the geographic area or the industry in which the investee
operates.
|
|
·
|
A recent example of the new issuance of a security, in which the issue price is less than our cost.
|
We estimate the fair value of the non-marketable equity securities
when an impairment indicator is present. The fair value is determined as a result of considering various unobservable inputs which
are available to us, including expectation of future income of the investees, net asset value of the investees, and material unrealized
losses to be considered in assets and liabilities held by the investees. We recognize impairment of non-marketable equity securities
when the fair value is below the carrying amount and the decline in fair value is considered to be other-than-temporary.
Our unrealized loss on investments in marketable equity securities
as of March 31, 2016 relates to Japanese companies (8 issuers) in various industries. The fair value of each investment is between
5.9% and 36.4% less than its cost. The main duration of the unrealized loss position was less than 12 months. We evaluated the
near-term prospects of the issuer and the analyst reports in relation to the severity and duration of impairment. Based on that
evaluation and our ability and intent to hold the investments for a reasonable period of time sufficient for a recovery of fair
value, we do not consider the investments to be other-than-temporarily impaired at March 31, 2016.
Impairment of investments in certain marketable equity securities
and nonmarketable equity securities, including funds, included in “Other income (expenses)” in our consolidated statements
of income, were recognized to reflect the decline in value considered to be other-than-temporary. The Company recognized impairment
loss of ¥29 million on nonmarketable equity securities for the year ended March 31, 2015 and ¥4 million on marketable equity
securities and ¥11 million on nonmarketable equity securities for the year ended March 31, 2016.
In addition to investments in securities, we also have investments
in equities for which we have significant influence over the investee’s operations and financial positions and are accounted
for by the equity method. For other-than-temporary declines in the value of such investments below the carrying amount, the investment
is reduced to fair value and an impairment loss is recognized.
Pension benefits costs
Employee pension benefit costs and obligations are dependent on
certain assumptions including discount rate, retirement rate and rate of increase in compensation levels, which are based upon
current statistical data, as well as the expected long-term rate of return on plan assets and other factors. Specifically, the
discount rate and expected long-term rate of return on assets are two critical assumptions in the determination of periodic pension
cost and pension liabilities. Assumptions are evaluated at least annually and when events occur or circumstances change which could
have a significant effect on these critical assumptions. In accordance with U.S. GAAP, actual results that differ from the assumptions
are accumulated and amortized over future periods. Therefore, actual results generally affect recognized expenses and the recorded
obligations for pensions in future periods. While management believes that the assumptions used are appropriate, differences in
actual experience or changes in assumptions may affect our pension obligations and future expenses.
We used a discount rate of 0.7% for the projected benefit obligation
as of March 31, 2016. The discount rate was determined by using the market yield of high-quality fixed income securities reflecting
the estimated timing of benefit payments.
We used an expected long-term rate of return on pension plan assets
of 3.0% as of March 31, 2016. To determine the expected long-term rate of return on pension plan assets, we consider a combination
of historical returns and prospective return assumptions derived from the pension trust funds’ managing company. The actual
return on the pension plan assets for the year ended March 31, 2016 was negative 0.5%.
The following table illustrates the sensitivity to a change in
the discount rate and the expected return on pension plan assets, while holding all other assumptions constant, for our pension
plan as of March 31, 2016.
Change in Assumption
|
|
Pre-Tax PBO
|
|
Pension Expense
|
|
Equity (Net
of Tax)
|
|
|
(millions of yen)
|
50 basis point increase/decrease in discount rate
|
|
(483)/529
|
|
(60)/62
|
|
41/(43)
|
|
|
|
|
|
|
|
50 basis point increase/decrease in expected return on assets
|
|
–
|
|
(16)/16
|
|
–
/(11)
|
Stock Based Compensation
The Company measures and records the compensation cost from stock compensation-type stock options based on
fair value. The fair value of the stock option is measured on the date of grant using the Black-Scholes option-pricing model, and
amortized over the requisite service period. The compensation cost is mainly included in
“General
and administrative” expense.
New Accounting Guidance
Accounting Guidance Issued But
Not Adopted as of March 31, 2016
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from
Contracts with Customers (Topic 606),” to clarify the principles for recognizing revenue and to develop a common revenue
standard for U.S. GAAP and International Financial Reporting Standards. This guidance also requires an entity to improve disclosures
to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. ASU 2015-14, "Revenue from Contracts with Customers: Deferral of the Effective Date,"
which was issued in August 2015, revised the effective date for this ASU to annual and interim periods beginning after December
15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning
after December 15, 2016, for public entities. The Company is currently evaluating the impact of adopting this guidance.
In July 2015, the FASB issued ASU 2015-11, “Inventory
(Topic 330): Simplifying the Measurement of Inventory,” which applies to inventory that is measured using first-in,
first-out (“FIFO”) or average cost methods. Under the updated guidance, an entity should measure inventory within
the scope of the guidance at the lower of cost and net realizable value, which is the estimated selling price in the ordinary
course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is
unchanged for inventory that is measured using last-in, first-out (“LIFO”). This ASU is effective for annual and
interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the
beginning of an interim or annual reporting period. The Company is currently evaluating the impact of adopting this
guidance.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in U.S. GAAP on the classification
and measurement of financial instruments. Changes to the current guidance primarily
affect the accounting
for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for
financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred
tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years
and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect
adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption
is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting
from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting
this guidance.
In February 2016, the FASB issued ASU 2016-02, "Leases
(Topic 842)," which requires organizations that lease assets to recognize on the balance sheet the assets and
liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognizes assets
and liabilities for leases with lease terms of more than twelve months and recognition, presentation and measurement in the
financial statements will depend on its classification as a finance or operating lease. In addition, the new guidance will
require disclosures to help investors and other financial statement users better understand the amount, timing and
uncertainty of cash flows arising from leases. Lessor accounting remains largely unchanged from current U.S. GAAP but does
contain some targeted improvements to align with the new revenue recognition guidance issued in 2014. The new standard is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, using a
modified retrospective approach, and early adoption is permitted. The Company is currently evaluating the impact of adopting
this guidance.
In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts
with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which is an amendment
to the new revenue recognition standard on assessing whether an entity is a principal or an agent in a revenue transaction. This
amendment addresses implementation issues that were discussed by the Revenue Recognition Transition Resource Group ("TRG")
to clarify the principal versus agent assessment and provide from more consistent application. This new standard has the same
effective date and transition requirements as ASU 2014-09. The Company is currently evaluating the impact of adopting this guidance.
B. Liquidity and Capital Resources
Liquidity and Capital Requirements
Our principal capital and liquidity needs in recent years have been
for capital expenditures for the development, expansion and maintenance of our network infrastructure, lease payments, payment
of principal and interest on outstanding borrowings, investments in group companies and other working capital. In our opinion,
our working capital is sufficient for our present requirements.
Capital expenditures.
Most of our capital expenditures relate
primarily to the development, expansion and maintenance of our network and service infrastructures and of our internal back-office
systems as well as software development. The investments are mostly for routers, servers, network equipment, containers, other
facilities necessary to offer services on our network and software. The table below shows our capital expenditures, which we define
as amounts paid for purchases of property and equipment plus acquisition of assets by entering into capital leases, for the last
three fiscal years. Capital expenditures for the fiscal year ended March 31, 2016 were larger than the fiscal year ended March
31, 2014 and 2015, mainly because there were capital expenditures including capitalized leases for facilities and equipment related
to cloud computing services in the fiscal year ended March 31, 2016 more than the fiscal year ended March 31, 2014 and 2015.
|
|
For
the fiscal year ended March 31,
|
|
|
2014
|
|
2015
|
|
2016
|
|
|
(millions of yen)
|
Capital expenditures, including capitalized leases
(1)
|
|
¥
|
12,560
|
|
|
¥
|
11,835
|
|
|
¥
|
14,812
|
|
_________________
(1) Further information
regarding capital expenditures, including capitalized leases and a reconciliation to the most directly comparable U.S. GAAP financial
measure, can be found in Item 3.A., “Selected Financial Data— Reconciliation of the Disclosed Non-GAAP Financial Measures
to the Most Directly Comparable GAAP Financial Measures.”
We expect that our capital expenditures, including capitalized leases, for the fiscal year ending March 31,
2017 related to our network services and systems integration business will be about the same as the amount for the fiscal year
ended March 31, 2016 although the amount may fluctuate. There will be capital expenditures for facilities and equipment for cloud
computing services and for network equipment and software which are related to the usual expansion and improvement of our existing
network. In addition, there will be capital expenditures related to our ATM operation business which is also expected to increase
compared to the previous fiscal year along with the placement of new ATMs.
We recorded a loss on disposal of property and equipment of ¥83
million, ¥101 million and ¥66 million for the fiscal years ended March 31, 2014, 2015 and 2016, respectively.
Lease payments.
We have operating lease agreements with telecommunications
carriers and others for the use of connectivity lines, including our domestic and international backbone as well as local access
lines that our customers use to connect to our network. The leases for domestic and international backbone connectivity are generally
non-cancelable for a minimum one-year lease period. We also lease office premises, for which refundable lease deposits are capitalized
as guarantee deposits, certain office equipment under non-cancelable operating leases, and its network operation centers under
non-cancelable operating leases which expire on various dates through the year 2021. Lease expenses related to backbone lines for
the fiscal years ended March 31, 2014, 2015 and 2016, amounted to ¥3.8 billion, ¥3.7 billion and ¥3.6 billion, respectively.
Lease expenses for local access lines for the fiscal years ended March 31, 2014, 2015 and 2016 amounted to ¥22.6 billion, ¥22.0
billion and ¥23.0 billion, respectively. Other lease expenses for the fiscal years ended March 31, 2014, 2015 and 2016, amounted
to ¥6.5 billion, ¥7.0 billion and ¥6.9 billion, respectively.
We conduct our connectivity and other services, including cloud
computing services by using data communications and other equipment leased under capital lease arrangements. For our ATM operation
business, we expect to continuously place new ATMs which are acquired by leasing transactions for the time being into operation;
therefore, lease payments for ATMs will increase along with placing new ATMs into operation.
We sold ATM and data communications equipment procured from a third
party vendor, which amounted to ¥0.8 billion and ¥2.8 billion respectively, to the leasing company for the years ended
March 31, 2015 and 2016 and concurrently entered into capital lease arrangements to lease the equipment back which resulted in
total lease payments of ¥0.8 billion due by March 2020 and ¥2.8 billion due by April 2022, related to the lease contracts
made in the year ended March 31, 2015 and 2016, respectively.
The fair value of the assets upon execution of the capital lease
agreements and accumulated depreciation amounted to ¥24.3 billion and ¥16.6 billion as of March 31, 2015 and ¥28.3
billion and ¥18.7 billion as of March 31, 2016, respectively.
As of March 31, 2016, future lease payments under non-cancelable
operating leases, including the aforementioned non-cancelable connectivity lease agreements (but excluding dedicated access lines
which we charge outright to customers), and capital leases were as follows:
|
|
|
|
Payment
due by period
|
|
|
(millions
of yen)
|
|
|
Total
contractual
amount
|
|
Less
than
1 year
|
|
1
to 3 years
|
|
3
to 5 years
|
|
More
than
5 years
|
Connectivity lines operating leases
|
|
¥
|
1,853
|
|
|
¥
|
871
|
|
|
¥
|
982
|
|
|
|
–
|
|
|
|
–
|
|
Other operating leases
|
|
|
5,252
|
|
|
|
3,579
|
|
|
|
1,156
|
|
|
¥
|
242
|
|
|
¥
|
275
|
|
Capital leases
|
|
|
12,162
|
|
|
|
4,142
|
|
|
|
5,401
|
|
|
|
2,281
|
|
|
|
338
|
|
Total minimum lease payments
(1)
|
|
¥
|
19,267
|
|
|
¥
|
8,592
|
|
|
¥
|
7,539
|
|
|
¥
|
2,523
|
|
|
¥
|
613
|
|
_________________
|
(1)
|
See Note 9 “Leases” to
our consolidated financial statements included in this annual report on Form 20-F.
|
Payments of principal and interest on outstanding
borrowings.
We require cash for payments of interest and principal on our outstanding borrowings.
Short-term borrowings.
As of March 31, 2016,
our short-term borrowings consisting of bank overdrafts were ¥9.3 billion. The weighted average interest rate of our short-term
borrowings at March 31, 2016 was 0.498%. Our short-term borrowings as of March 31, 2016 stayed the same as the balance of March
31, 2015. Our unused balance under our bank overdraft agreements, uncommitted, was ¥10.8 billion in short-term borrowings as
of March 31, 2016.
Collateral for borrowings
.
Substantially all
of our short-term and long-term borrowings are made under agreements which, as is customary in Japan, provide that under certain
conditions the banks may require us to provide collateral or guarantees with respect to the borrowings. We did not provide banks
with any collateral for outstanding loans as of March 31, 2015 and 2016. Our primary banking relationships are with Bank of Tokyo-Mitsubishi
UFJ, Ltd., Mizuho Bank, Ltd., Sumitomo Mitsui Banking Corporation, and Mitsubishi UFJ Trust and Banking Corporation. The banks
are also shareholders and customers of ours.
Investments in current and former group companies.
In the past, we have made substantial investments in current and former group companies. We may need to provide additional
investment in our group companies to enhance or maintain our business synergy with our affiliated companies in the future. See
Item 4.B., “Our Group Companies” for information on investment in equity method investees.
Working capital needs.
Our principal working
capital requirements are for payments for our domestic and international backbone, local access lines, network equipment and software.
We also require working capital requirements for personnel expenses, office rents and other operating expenses.
Capital Resources
We seek to manage our capital resources and liquidity to provide
sufficient funds for current and future financial obligations. We have traditionally met our capital and liquidity requirements
through cash flows from operating activities, long-term and short-term borrowings from financial institutions, capital leases and
issuances of equity securities. At March 31, 2016, we had cash and cash equivalents of ¥19.6 billion.
Short-term and long-term borrowings
.
Short-term
and long-term borrowings provide us with an important source for maintaining an adequate level of working capital, acquisition
of fixed assets and investments. We plan to refinance our short-term borrowings or use the unused balance outstanding of ¥10.8
billion, uncommitted, as of March 31, 2016 under the bank overdraft agreement for maintaining adequate level of working capital,
acquisition of fixed assets and investments. See — “Payments of principal and interest on outstanding borrowings”
above.
Cash flows from operating activities.
We generated
¥12.0 billion by operating activities for the year ended March 31, 2016. See — “Cash Flows” below.
Capital leases.
Capital leases also provide
us with an important source of financing. See Note 9 “Leases” to our consolidated financial statements included in
this annual report on Form 20-F.
Cash Flows
We had cash and cash equivalents of ¥19.6 billion at March
31, 2016 compared to ¥21.1 billion at March 31, 2015.
The following table presents information about our cash flows during
the fiscal years ended March 31, 2014, 2015 and 2016:
|
|
Fiscal
year ended March 31,
|
|
|
2014
|
|
2015
|
|
2016
|
|
|
(millions of yen)
|
Net cash provided by operating activities
|
|
¥
|
8,787
|
|
|
¥
|
12,912
|
|
|
¥
|
12,051
|
|
Net cash used in investing activities
|
|
|
(10,203
|
)
|
|
|
(8,073
|
)
|
|
|
(8,377
|
)
|
Net cash provided by (used in) financing activities
|
|
|
11,382
|
|
|
|
(6,283
|
)
|
|
|
(5,201
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
196
|
|
|
|
117
|
|
|
|
2
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
10,162
|
|
|
|
(1,327
|
)
|
|
|
(1,525
|
)
|
Cash and cash equivalents at beginning of the year
|
|
|
12,259
|
|
|
|
22,421
|
|
|
|
21,094
|
|
Cash and cash equivalents at end of the year
|
|
¥
|
22,421
|
|
|
¥
|
21,094
|
|
|
¥
|
19,569
|
|
Year Ended March 31, 2016 as
Compared to the Year Ended March 31, 2015
Net cash provided by operating activities for the fiscal year
ended March 31, 2016 was ¥12.1 billion, a decrease of ¥0.8 billion from ¥12.9 billion for the previous fiscal year.
Net income for the fiscal year ended March 31, 2016 increased by ¥0.8 billion from the previous fiscal year. Additionally,
deferred income tax expense increased by ¥0.4 billion from the previous fiscal year which is due to a recognition of deferred
tax asset for a tax loss carryforward by our consolidated subsidiary in the fiscal year ended March 31, 2014 and depreciation
and amortization increased by ¥0.2 billion from the previous fiscal year which is due to our recent years’ business
investment enhancement. However, the changes in operating assets and liabilities resulted in a temporary negative impact of ¥1.8
billion compared to the previous fiscal year despite the fact that income taxes payable and accounts payable increased and accounts
receivable decreased. The temporary negative impact mainly includes the following: an increase in other assets in the fiscal year
ended March 31, 2016 which is mainly due to an increase in prepaid expenses-noncurrent related to the payment of license fee along
with revenue growth and service developments; an increase in inventories related to several large projects; a decrease in other
current and noncurrent liabilities; and changes in accrued expenses associated with our head office relocation in the previous
year.
Net cash used in investing activities for the fiscal year ended
March 31, 2016 was ¥8.4 billion, an increase of ¥0.3 billion from ¥8.1 billion for the previous fiscal year. The increase
mainly reflects the following factors: an increase of ¥2.7 billion in purchases of property and equipment, an increase of ¥1.8
billion in proceeds from sales of property and equipment, a decrease of ¥1.6 billion in refund of guarantee deposits and a
decrease of ¥1.2 billion in payments of guarantee deposits due to our office relocation in the previous year.
Net cash used in financing activities for the fiscal year ended
March 31, 2016 was ¥5.2 billion, a decrease of ¥1.1 billion from net cash used in financing activities of ¥6.3 billion
for the previous fiscal year. The change resulted from an increase in proceeds from issuance of short-term borrowings by ¥1.5
billion, and an increase in repayments of borrowings by ¥0.5 billion.
Year Ended March 31, 2015 as
Compared to the Year Ended March 31, 2014
Net cash provided by operating activities for the fiscal year ended
March 31, 2015 was ¥12.9 billion, an increase of ¥4.1 billion from ¥8.8 billion for the previous fiscal year. Net income
for the fiscal year ended March 31, 2015 decreased by ¥1.3 billion from the previous fiscal year. However, depreciation and
amortization increased by ¥0.9 billion from the previous fiscal year which is due to our recent years’ business investment
enhancement and deferred income tax expense increased from the previous fiscal year which is due to a recognition of deferred tax
asset for tax loss carryforward by our consolidated subsidiary in the previous fiscal year. Additionally, the changes in operating
assets and liabilities resulted in a temporary positive impact of ¥3.0 billion compared to the previous fiscal year despite
the fact that accounts receivable increased along with the revenue increase. The temporary positive impact mainly includes the
followings: an increase in accrued expenses related to our head office relocation in the fiscal year ended March 31, 2015; a recognition
of other assets related to the payment of license fees in the previous fiscal year; an increase in other current and noncurrent
liabilities in the fiscal year ended March 31, 2015 which is mainly due to an increase in consumption tax payable associated with
an increase in revenue and a rise in the Japanese consumption tax rate; and a decrease in inventories which is mainly because we
recognized large-scale inventories for certain large projects in the previous fiscal year.
Net cash used in investing activities for the fiscal year ended
March 31, 2015 was ¥8.1 billion, a decrease of ¥2.1 billion from ¥10.2 billion for the previous fiscal year. The decrease
mainly reflects the following factors: a decrease of ¥1.0 billion in purchases of property and equipment, a decrease of ¥0.9
billion in purchases of other investments, an increase of ¥1.6 billion in refund of guarantee deposits and an increase of ¥0.9
billion in payments of guarantee deposits along with our office relocation.
Net cash used in financing activities for the fiscal year ended
March 31, 2015 was ¥6.3 billion, a decrease of ¥17.7 billion from net cash provided by financing activities of ¥11.4
billion for the previous fiscal year. The change resulted from proceeds from issuance of common stock of ¥17.3 billion, net
of issuance cost, an increase in principal payments under capital leases by ¥0.2 billion, and an increase in net repayments
of borrowings by ¥0.2 billion.
Contingencies
We did not have any material contingent liabilities as of March
31, 2016.
C. Research and Development, Patents and Licenses,
etc.
See the information in Item 4.B., “Business Overview
— Research and Development.”
D. Trend Information
Factors Affecting Our Future Financial Results
We expect that the following are the most significant factors likely
to affect our financial results and those of our consolidated subsidiaries. You should also consult Item 3.D. “Risk
Factors” and the other portions of this annual report on Form 20-F for additional factors affecting our financial results.
Revenues
We have two business segments: a network services and systems integration
business segment and an ATM operation business segment. The network services and systems integration business segment is comprised
of Internet connectivity services, WAN services, outsourcing services, systems integration and equipment sales.
Network services revenues
Network services revenues consist of our revenues from Internet
connectivity services for enterprise, Internet connectivity services for consumers, WAN services and outsourcing services. Our
network services revenues accounted for 58.9%, 56.1% and 56.4% of our total revenues for the fiscal years ended March 31,
2014, 2015, and 2016, respectively. As our Internet connectivity services for enterprise and WAN services customers are more likely
to use our outsourcing services or systems integration as their network needs develop, Internet connectivity services for enterprise
and WAN services are important for the growth of our outsourcing services or systems integration business.
Internet connectivity services for enterprise
Our revenues from Internet connectivity services for enterprise
accounted for 14.5%, 13.3% and 12.5% of our total revenues for the fiscal years ended March 31, 2014, 2015 and 2016, respectively.
Revenues from Internet connectivity services for enterprise depend on the size of our customer base, the average contracted bandwidth
and unit price of our services. The market for Internet connectivity services for enterprise generally follows the trends written
below:
Increase in contracted bandwidth.
Total contracted bandwidth for Internet connectivity services
for enterprise customers increased to 2,315.9 Gbps as of March 31, 2016 from 1,730.8 Gbps for the previous fiscal year end. The
number of IP service contracts for the bandwidth over 100 Mbps increased to 899 for the fiscal year ended March 31, 2016 from 844
for the previous fiscal year end. This increase is mainly due to an increase in customers' demand for broader bandwidth for their
Internet connectivity. The total contracted bandwidth for Internet connectivity services for enterprise is calculated by adding
the contracted bandwidth for each of the following services: IP service, IIJ data center connectivity service and broadband services.
Although we do not expect revenue per contract to grow largely in the fiscal year ending March 31, 2017 due to continuing competition,
we believe that customer demand for broader bandwidth should continue as the use of broadband by corporate customers expands and
as we try to acquire new customers and increase the bandwidth of existing customers as well as maintain the quality of our services
to differentiate them from those of our competitors.
Increasing demand for mobile data communications services.
Demand for our mobile data communications
service for enterprise called IIJ Mobile Service, which is provided under an MVNO scheme, has increased since its introduction
in January 2008. IIJ Mobile Service’s subscriptions increased to 431,030 as of March 31, 2016 from 187,429 for the previous
fiscal year end. We target corporate customers who are security conscious and looking for data communication services with strong
security features such as VPN access and private access. Increasing demand related to M2M connectivity is another trend in recent
years we have been seeing. To capture the demand, we have developed related service line-ups. We expect demand for mobile data
communication services to contribute to an increase in our outsourcing services and systems integration revenues as usage and implementation
of these connectivity services increase the demand for outsourcing services such as security services and network systems integration.
We also started “IIJ Mobile Platform Services” under which we operate as MVNE by providing our MVNO service platform
to corporate customers so that they can incorporate MVNO services in their businesses. The related subscriptions, which are included
in IIJ Mobile Services subscriptions, increased to approximately 251 thousand as of March 31, 2016 from approximately 67 thousand
for the previous fiscal year end.
Continuous demand for broadband services.
Demand for broadband services such as IIJ FiberAccess/F,
IIJ DSL/F and IIJ DSL/A is steady as the services are used to connect corporate branches and remote offices. For access lines,
the services use ADSL lines with a maximum speed of 47 Mbps or optical lines with a maximum speed of 1Gbps. The number of contracts
for our broadband services increased to 75,932 as of March 31, 2016 from 62,926 for the previous fiscal year end. We also expect
that demand for broadband services should contribute to an increase in our outsourcing services and systems integration revenues
as usage and implementation of these connectivity services increase the demand for outsourcing services such as security services
and network systems integration.
Although we do not expect prices of Internet connectivity services for enterprise to increase in the fiscal year
ending March 31, 2017, we anticipate that corporate customers’ demand for broader bandwidth and mobile data communications
services should contribute to our revenue growth as the use of broadband and mobile data communications by corporate customers
expands. We also plan to focus on acquiring new customers as well as increasing the bandwidth of existing customers by maintaining
the quality of our services to differentiate them from those of our competitors.
Internet Connectivity services for consumers
Our revenues from Internet connectivity services for consumers
accounted for 5.3%, 6.7% and 10.8% of our total revenues for the fiscal years ended March 31, 2014, 2015 and 2016, respectively.
Revenues from Internet connectivity services for consumers mainly depend on the size of our customer base and pricing. The size
of our customer base depends primarily on the popularity of services under our brand name, our sales partners as well as the attractiveness
of our service offerings which is measured primarily by the quality of service and our ability to attract new customers. Internet
connectivity services for consumers’ subscriptions increased to 1,230,600 as of March 31, 2016 from 891,519 for the previous
fiscal year end. Our mobile services for consumers contributed to the increase in the number of subscriptions.
Increasing demands for mobile services for consumers.
From February 2012, we started to provide mobile
services to consumers by using our MVNO service infrastructure, which was formerly provided only to corporate customers. The revenue
from this service increased to ¥11.0 billion for the fiscal year ended March 31, 2016 from ¥4.3 billion from the previous
fiscal year. The subscriptions for this service increased to approximately 747 thousand as of March 31, 2016 from approximately
430 thousand for the previous fiscal year end. We offer inexpensive LTE SIM cards which are inserted to individual smart phones
and portable devises. We started to offer voice call function in April 2014 with an expectation that it would generate more subscriptions.
From October 2014, we started to provide prepaid SIM cards to foreign tourists visiting Japan. These SIM cards are sold at convenience
stores, major electronics retail stores, department stores, airports and to passengers while they are boarding certain flights.
Since the inexpensive LTE SIM card market is new in Japan, we are uncertain about the extent of how much the market will expand
and the timeframe of that expansion.
General trends of Internet connectivity services for
consumers.
We offer our Internet connectivity services for consumers not only directly, but also through sales partners
including hi-ho and Excite Japan Co., Ltd. These service providers sell Internet connectivity services to consumers under their
own name but they are using our Internet network infrastructure to provide such services. From March 2015, we started to offer
“IIJmio Hikari,” which is a bundled service packaging optical fiber broadband service with ISP services. IIJmio Hikari
is replacing our conventional Internet connectivity services for consumers. We also offer our mobile services for consumers as
an optional service for IIJmio Hikari with some monthly charge discount.
WAN services
Our revenues from WAN services accounted for 21.9%, 19.8% and 17.9%
of our total revenues for the fiscal year ended March 31, 2014, 2015 and 2016, respectively. Demand for WAN services is relatively
stable with continuous use by certain large clients who use the services to connect corporate mission critical systems. Such transaction
volume tends to be large and unit prices tend to be higher than our other network services. Therefore, revenues can fluctuate significantly
with the absence or addition of such large orders, accordingly future revenue is difficult to forecast.
Outsourcing Services
Our revenues from outsourcing services accounted for 17.2%, 16.3%
and 15.1% of our total revenues for the fiscal year ended March 31, 2014, 2015 and 2016, respectively. Outsourcing services consist
of network-related services, server-related services, security-related services, data center-related facility services and operation
and management services, and IIJ GIO/Hosting Package, one of our cloud computing services. For the fiscal year ended March 31,
2016, outsourcing services revenues increased to ¥21.2 billion from ¥20.1 billion for the fiscal year ended March 31, 2015
while IIJ GIO/Hosting Package revenues decreased to approximately ¥2.0 billion from approximately ¥2.2 billion for the
previous fiscal year. Excluding the revenue growth from IIJ GIO/Hosting Package, outsourcing services’ revenue for the fiscal
year ended March 31, 2016 increased by 7.6% compared to the previous fiscal year.
The growth of outsourcing services is primarily due to the increase
in demand for security services as there have been security incidents such as targeted and DDoS attacks on Japanese business enterprises
and public sector entities. We expect that corporate customers will continue to increase their use of the Internet as a business
tool and will increasingly rely on an expanding range of outsourcing services to enhance productivity, reduce costs and improve
service reliability. We believe our cloud computing service IIJ GIO/Hosting Package will contribute to the revenue growth for the
middle-to long-term although we also expect the current weak growth pace to continue for a while.
Systems integration revenues,
including related equipment sales revenues
Our systems integration revenue consists of systems construction
and systems operation and maintenance.
Systems construction, which is a one-time revenue, accounted for
16.3%, 16.6% and 15.0% of our total revenues for the fiscal year ended March 31, 2014, 2015 and 2016, respectively. Systems construction
revenues, including related equipment sales revenues for the fiscal year ended March 31, 2016 increased from the previous fiscal
year as we continued to accumulate orders including large-scale ones.
Systems operation and maintenance, which is a monthly recurring
revenue, accounted for 20.8%, 22.6% and 23.5% for the fiscal year ended March 31, 2014, 2015 and 2016, respectively. Revenue for
IIJ GIO/Component service, one of our cloud computing services, is included in the systems operation and maintenance revenues.
Systems operation and maintenance revenues for the fiscal year ended March 31, 2016 increased by 18.9% compared to the previous
fiscal year mainly because many of accumulated systems construction projects have been shifted to the operation and maintenance
and IIJ GIO/Component revenue continued to increase. Excluding the revenue growth from IIJ GIO/Component service, systems operation
and maintenance revenues increased by 18.2% compared to the previous fiscal year. Approximately 85.5% of our cloud computing service
revenues for the fiscal year ended March 31, 2016 was recognized in systems operation and maintenance and 14.5% was recognized
in outsourcing services.
For the fiscal year ended March 31, 2016, our cloud computing services
revenues were approximately ¥14.1 billion, an increase of approximately ¥1.8 billion from the previous fiscal year, and
for the fiscal year ending March 31, 2017, we target approximately ¥16.2 billion in revenue. We launched a new cloud service
“IIJ GIO Infrastructure P2” in November 2015. The service is targeted towards Japanese enterprises that seek to migrate
their core business platform systems to the cloud by offering reliable public cloud infrastructure with increased processing performance
as well as private cloud infrastructure.
For the fiscal year ending March 31, 2017, we should continue to
see a strong appetite for IT investment along with favorable market situations and we expect revenue to increase from the fiscal
year ended March 31, 2016. As systems integration revenues can fluctuate significantly in accordance with the absence or addition
of large orders, they are accordingly difficult to forecast. For systems operation and maintenance revenues, we anticipate that
we can increase them from the increase in systems construction revenue which should migrate to systems operation and maintenance
as well as accumulation of our cloud computing services orders. In the middle-to long-term, we also anticipate that Japanese companies
should increase IT-related investments for their network systems when the general economic situation and the business results of
Japanese companies recover.
Equipment sales revenues
Our equipment sales revenues consist primarily of sales of networking
and other related equipment as requested by our customers, other than that provided in connection with our systems integration
services. We are seeing an increase in portable devices and smartphone orders along with increasing needs for mobile services for
both enterprise and consumer. Our equipment sales revenues accounted for 1.5%, 1.8% and 2.3% of our total revenues for the fiscal
year ended March 31, 2014, 2015 and 2016, respectively.
ATM Operation Business revenues
ATM operation business revenues consist primarily of commission
fees for each withdrawal with the use of ATMs. ATM commission fees collected from each withdrawal are aggregated every month and
recognized as ATM operation business revenues. The number of daily withdrawing transactions for the fiscal year ended March 31,
2016 stayed almost the same as the previous fiscal year. Our ATM operation business revenues and its percentage of our total revenue
was ¥2.8 billion, ¥3.6 billion and ¥3.9 billion and 2.5%, 3.0% and 2.8% for the fiscal years ended March 31, 2014,
2015 and 2016, respectively. The number of placed ATMs as of March 31, 2016 was 1,087, an increase of 28 ATMs from the previous
fiscal year end. We expect a similar ATM placement pace to continue for a while. The ATM operation business revenues should increase
along with the placement of additional ATMs despite the possibility that we may see a continuous decrease in the number of daily
transaction due, for example, to a decrease in number of pinball players as the Japanese population declines or to a decrease in
consumer demand prompted by an increase in the Japanese consumption tax rate.
Additional factors affecting revenues
A number of other factors may affect demand for our services and
in turn our revenues, including overall increases in business usage of Internet and network solutions and our range of service
offerings.
Increase in business usage:
Our revenues will be affected by the extent and speed with which businesses
in Japan utilize Internet and network solutions to their full potential, including, for example, electronic transactions between
businesses and wider range of devices accessing to Internet. Such services require high-quality and high-capacity connectivity
services for both businesses and individuals. Such services also require provision of total network solutions including various
Internet connectivity services, systems integration and other outsourcing services which we believe we are well positioned to provide.
The degree of business usage will also depend upon a variety of factors including:
|
·
|
technological advances, reliability of security systems and users’ familiarity with and confidence in new technologies,
|
|
·
|
the rate at which Japanese companies in certain industries significantly increases their Internet usage, and
|
|
·
|
corporate budgets for information technologies, including Internet-related items.
|
Range of service offerings:
To increase our revenues from business users, we provide a wide variety
of services and continue to introduce new services. For Internet connectivity services, we have introduced LTE services as an addition
to our mobile services. For cloud computing services, we launched a new service platform “IIJ GIO Infrastructure P2”
which offers reliable public cloud infrastructure with increased processing performance and private cloud infrastructure. For network
services for enterprise, we started to offer “IIJ Omnibus Service” which incorporates SDN and NFV technologies to offer
several network elements automatically. We anticipate these steps will allow us to sell a greater variety of services to our high-end
corporate users and to meet Japanese enterprises’ IT needs. However, we will still be strongly dependent on the Japanese
economy and on Japanese companies and their information technology budgets. We expect Internet usage to continue to grow in Japan
and that businesses will continue to diversify their uses of the Internet. Our ability to develop and offer a broad range of services
to meet our customers’ demands will significantly influence our future revenues.
Synergies between network services and systems integration
:
Most of our systems integration customers
come from our Internet connectivity services customers, and we expect these relationships to continue. As part of our systems integration
business, we offer solution services for corporate information network systems, consultation, project planning, system design and
systems/operation outsourcing or Internet VPN solution services which combine the FLET’S Internet connectivity or mobile
connectivity services with SEIL, adopted by customers who have multiple locations, such as branches, offices and factories. Cloud
computing services and security-related services are also provided together with connectivity and systems integration services.
The ability to introduce a wide range of services, including solutions necessary to build corporate information network systems,
like disaster recovery services and Internet VPN, Voice over IP (“VoIP”), SEIL, private mobile access solutions, SEIL/SMF
and wireless LAN service, is an important competitive factor.
Synergies between the Group companies:
The
group works together as a team to provide network solutions to our customers, mainly corporate and governmental
organizations.
Overseas business:
The Group is enhancing its overseas operations mainly to fulfill the broad range
of IT network related needs of our Japanese customers that are headed abroad to expand their overseas business. As a group, we
aim to expand our cloud computing related services and overseas business by leveraging our customer base and our engineering skills.
However, our overseas business portion is still relatively small. For the fiscal year ended March 31, 2016, our overseas revenue,
which is mainly recognized in systems integration revenue, and operating loss were approximately ¥5.3 billion and approximately
¥0.5 billion compared to approximately ¥4.9 billion and ¥0.8 billion for the previous fiscal year, respectively. For
the fiscal year ending March 31, 2017, we target overseas business revenue to be approximately ¥7.0 billion.
Costs and expenses
Costs and expenses include cost of network services revenues, cost
of systems integration revenues, cost of equipment sales revenues, cost of ATM operation business revenues, sales and marketing
expenses, general and administrative expenses and research and development expenses.
Cost of network services revenues
Our primary cost of network services revenues is the leasing fees
that we pay for the leased lines which comprise our network and for the dedicated local access lines that our subscribers use to
connect with our network. Other primary components of our costs are leasing fees that we pay for MVNO service infrastructure, depreciation
and amortization of capital leases for network equipment, personnel and other costs for technical and customer support staff and
network operation center related costs. Most of our network equipment is leased rather than purchased to take advantage of the
financing provided by a capital lease arrangement.
We have made continuous investments in past years to develop and
expand our network along with our business expansion. For the fiscal year ended March 31, 2016, our leased lines and other connectivity
costs were ¥27.0 billion or 34.1% of our total network services revenues. For the previous fiscal year, these costs were ¥26.0
billion or 38.7% of total our network services revenues.
|
·
|
Backbone cost:
Backbone cost for the fiscal year ended March 31, 2016 was ¥3.6 billion, a slight decrease
compared to the fiscal year ended March 31, 2015. We do not expect that our backbone costs to significantly increase.
|
|
·
|
Dedicated local access line costs:
We collect dedicated local access line fees from subscribers and pay these
fees over to the carriers. Dedicated local access line costs for the fiscal year ended March 31, 2016 were ¥22.9 billion compared
to ¥21.9 billion for the fiscal year ended March 31, 2015. Other connectivity costs were ¥0.5 billion for the fiscal year
ended March 31, 2016, compared to ¥0.4 billion for the previous fiscal year.
|
Depreciation and amortization cost related to network service revenues
increased by ¥0.5 billion to ¥4.5 billion for the fiscal year ended March 31, 2016 from ¥3.9 billion for the fiscal
year ended March 31, 2015 along with the increase in capital expenditures related to network service revenues. Along with the increase
in capital expenditures, we expect depreciation and amortization to increase.
Outsourcing-related costs increased by ¥7.1 billion from the
previous year mainly due to an increase in purchasing volume of mobile-related service facility including mobile bandwidth from
NTT Docomo along with an increase in consumer mobile service subscriptions.
The cost of mobile services revenues, most of which is recognized
as outsourcing-related costs of network services revenues, has been increasing along with the rapid increase in consumer mobile
and MVNE subscriptions. We have been purchasing NTT Docomo’s mobile infrastructure to provide our mobile services and we
have been increasing our purchasing volume in order to offer reliable connectivity to our customers, both enterprise and consumer.
NTT Docomo charges a “wholesale telecommunications service charge” to all of its MVNOs, including us. NTT Docomo calculates
the unit price in accordance with the “Telecommunications Business Law” and the “Guidelines related to Operation
of the Institution for Category II Designated Telecommunications Facilities,” which are both administrated by the MIC. The
unit price is a flat-rate per Mbps and is calculated based mainly on NTT Docomo’s actual cost related to its mobile data
communication business. In recent years, such unit price decreased by 41.2%, 56.6%, 23.5%, and 16.9% annually in the fiscal years
2011, 2012, 2013 and 2014 respectively. The corresponding unit price is approximately ¥2.8 million, approximately ¥1.2
million, approximately ¥0.9 million, and approximately ¥0.8 million in the fiscal years 2011, 2012, 2013 and 2014 respectively.
Amounts we pay to NTT Docomo for our mobile services have been increasing along with the purchasing volume increase, while
the unit price itself continues to decrease.
Costs of systems integration revenues and equipment sales
The cost of our systems integration revenues and equipment sales
consists of purchasing costs, personnel-related costs, outsourcing-related costs, network operation-related costs and other costs.
Purchasing costs increase or decrease in tandem with systems construction revenues and equipment sales revenues. Personnel and
outsourcing-related costs are mainly costs of engineering staff. Network operation-related costs are costs such as depreciation
and amortization of capital leases for system-related equipment including facilities and equipment for cloud computing services.
The main determinant of whether our gross margin will increase or decrease depends on whether we can secure profit for each systems
integration project, whether we are able to adequately control the man-hour for each systems integration project as initially estimated,
the profitability of our cloud computing services and whether we are able to achieve enough revenue that covers our total costs.
For the fiscal year ending March 31, 2017, along with the increase in systems construction revenue which we expect to increase
as the Japanese economy recovers, we expect the costs of systems integration revenues to also increase. We should continue to focus
on controlling personnel and outsourcing costs adequately as well as carefully consider the timing of increasing facilities and
equipment for IIJ GIO as cloud computing services require a large upfront investment.
Costs of ATM Operation Business
The cost of our ATM operation business consists primarily of systems
related costs including up-front system development and outsourcing related costs. For the fiscal year ended March 31, 2016, the
ATM operation business recorded approximately ¥2.6 billion in costs. Along with the increased number of serviced ATMs, additional
capital expenditures including capitalized leases related to the placement of ATMs in places such as Japanese pinball parlors,
operation and maintenance fees and other costs will increase.
Sales and marketing
Our sales and marketing expenses consist primarily of personnel
expenses related to sales and marketing activities, general advertising expenses and sales commission. Our sales and marketing
expenses should increase to the extent that we expand our operations, hire additional employees and increase our sales and marketing
activities such as promotion of our cloud services and mobile services for consumers. Sales commission expenses for our sales channels
should also increase as we acquire more subscriptions for our mobile services for consumers. We expect sales and marketing expenses
to increase in the fiscal year ending March 31, 2017 as we expand our business, increase the number of sales personnel and further
promote our cloud computing services and mobile services for consumers. Sales and marketing expenses were ¥10.6 billion for
the fiscal year ended March 31, 2016, compared to ¥9.2 billion for the previous fiscal year.
General and administrative
Our general and administrative expenses primarily include expenses
associated with our management, accounting, finance and administrative functions, including personnel expenses. We relocated our
head office in the fiscal year ended March 31, 2015. In regards to the contract for the new head office specifically, the related
office rent expenses should be reduced for a certain period. Our general and administrative expenses will increase to the extent
that we grow our business and hire new employees. We expect general and administrative expenses to increase in the fiscal year
ending March 31, 2017 in accordance with our business growth.
Research and development
Our research and development expenses include primarily expenses
associated with personnel expenses related to research and development activities. Our research and development expenses will increase
to the extent that we expand our research and development activities. We expect the research and development expenses to slightly
increase for the fiscal year ending March 31, 2017.
Other income (expenses)
Our other income and expenses include interest income and expenses
and other primary items such as foreign exchange gains or losses, net gain on other investments and impairment losses on other
investments.
Interest expense:
Most of our interest expense is from capital leases and bank borrowings. Interest
income and interest expenses are also affected by the fluctuation of market interest rates and our total amount of outstanding
borrowings. If we increase capital leases or borrowings in order to finance further development of our backbone, data centers and
for other investments, interest expenses will increase.
Foreign exchange losses:
Attributed to the weaker Japanese yen against the U.S. dollar and British
pound, we recognized foreign currency losses of ¥71 million for the fiscal year ended March 31, 2016. The assets held by us
which are exposed to foreign currency exchange risk are mainly U.S. dollar and British pound denominated bank deposits.
Net gain on other investments:
Gain on other investments are mostly raised from available-for-sale
securities and fund investments. Fluctuations in the fair value of other investments may affect our financial results. Currently
we do not expect that we will have large capital gains or losses from other investments for the fiscal year ending March 31, 2017.
Impairment of other investments:
We hold other investments comprised of available-for-sale securities,
nonmarketable equity securities and funds. If the fair value of other investments becomes lower than its costs and such decline
in fair value is evaluated as other-than-temporary, we will have to recognize an impairment loss on investment.
|
E.
|
Off-Balance Sheet Arrangements
|
We do not have any off-balance sheet arrangements as is defined for purposes of Item
5.E. of Form 20-F.
F. Tabular Disclosure of Contractual Obligations
The following table shows our material contractual payment obligations under our agreements
as of March 31, 2016:
|
|
Payments
due by period (in millions of yen)
|
Contractual
Obligations
|
|
Total
|
|
less
than 1
year
|
|
1-3
years
|
|
3-5
years
|
|
more
than
5 years
|
Capital lease obligations
|
|
¥
|
12,162
|
|
|
¥
|
4,142
|
|
|
¥
|
5,401
|
|
|
¥
|
2,281
|
|
|
¥
|
338
|
|
Operating lease obligations
|
|
|
7,105
|
|
|
|
4,450
|
|
|
|
2,138
|
|
|
|
242
|
|
|
|
275
|
|
Total
(1) (2)
|
|
¥
|
19,267
|
|
|
¥
|
8,592
|
|
|
¥
|
7,539
|
|
|
¥
|
2,523
|
|
|
¥
|
613
|
|
_____
|
(1)
|
The
table above does not include short term borrowings. For short term borrowings, see Item
5.B “Liquidity and Capital Resource” and Note 11 “Borrowings”
to our consolidated financial statements included in this annual report on Form 20-F.
|
|
(2)
|
The
table above does not include obligations for interest payments on debt, as such payments
are not material. For interest payments regarding capital lease, see Note 9 “Leases”
to our consolidated financial statements included in this annual report on Form 20-F.
|
G. Safe Harbor
This annual report contains forward-looking statements about us and
our industry that are based on our current expectations, assumptions, estimates and projections. These forward-looking statements
are subject to various risks and uncertainties. These statements discuss future expectations, identify strategies, discuss market
trends, contain projections of results of our operations and our financial condition, and state other forward-looking information.
Known and unknown risks, uncertainties and other factors could cause our actual results to differ materially from those contained
in or suggested by any forward-looking statement. We cannot provide any assurance that our expectations, projections, anticipated
estimates or other information expressed in these forward-looking statements will turn out to be correct. We do not undertake any
obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Important risks and factors that could cause our actual results
to differ materially from our forward-looking statements are generally provided in Item 3.D. “Risk Factors” and
elsewhere in this annual report on Form 20-F and include, without limitation:
|
·
|
that we may not be able to achieve or sustain profitability in the near future,
|
|
·
|
that we may not be able to compete effectively against competitors which have greater financial, marketing and other resources,
|
|
·
|
that our investments in our new business and service developments may not produce the returns we expect or may affect our results
of operations and financial condition adversely, and
|
|
·
|
that our investments in our subsidiaries and affiliated companies may not produce the returns that we expect or may adversely
affect our results of operations and financial condition.
|
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The Company's Board of Directors consists of 13 directors, including
four outside directors. The Company's Board of Company Auditors consists of four company auditors, three of whom are outside company
auditors, including an attorney from a Japanese law firm and a certified public accountant. Further, the Company has an internal
auditing office consisting of three members.
Additionally, we introduced an executive officer system in 2010 with
the aim of further enhancing our corporate governance by separating its decision making, supervisory function and business execution
function.
There is no family relationship between any director or executive
officer and any other director or executive officer. The following table provides information about our directors and company auditors
as of June 27, 2016.
Name
|
Position
|
Date of birth
|
Current term
expires
|
Initial
appointment date
|
Numbers of
Shares Owned
(1)
|
Percentage of
Shares Owned
(1)
|
Koichi Suzuki
|
Chairman,
Chief Executive Officer and Representative Director
|
Sep. 3, 1946
|
June 2017
|
Dec. 1992
|
1,815,198
(2)
|
3.89%
(2)
|
Eijiro Katsu
|
President,
Chief Operating Officer and Representative Director
|
June 19, 1950
|
June 2017
|
June 2013
|
14,598
|
0.03%
|
Hideshi Hojo
|
Senior Managing Director
|
Dec. 22, 1957
|
June 2017
|
June 2000
|
24,929
|
0.05%
|
Takeshi Kikuchi
|
Senior Managing Director
|
Apr. 27, 1959
|
June 2018
|
June 2010
|
59,538
|
0.13%
|
Akihisa Watai
|
Managing Director,
Chief Financial Officer and Chief Accounting Officer
|
Sep. 30, 1965
|
June 2018
|
June 2004
|
12,264
|
0.03%
|
Tadashi Kawashima
|
Managing Director
|
Feb. 27,1963
|
June 2017
|
June 2015
|
429
|
0.00%
|
Junichi Shimagami
|
Director
|
Apr. 17,1967
|
June 2017
|
June 2015
(3)
|
8,764
|
0.02%
|
Yasurou Tanahashi
|
Director
|
Jan. 4, 1941
|
June 2018
|
June 2004
|
0
|
—
|
Junnosuke Furukawa
|
Director
|
Dec. 5, 1935
|
June 2017
|
June 2005
|
0
|
—
|
Shingo Oda
|
Director
|
Nov. 8, 1944
|
June 2018
|
June 2008
|
0
|
—
|
Toshinori Iwasawa
|
Director
|
May 8, 1962
|
June 2017
|
June 2013
|
938
|
0.00%
|
Tadashi Okamura
|
Director
|
July 26,1938
|
June 2017
|
June 2015
|
0
|
—
|
Hiroki Watanabe
|
Director
|
Mar. 15,1953
|
June 2017
|
June 2015
|
0
|
—
|
Kazuhiro Ohira
|
Company Auditor
|
Dec. 26, 1957
|
June 2020
|
June 2010
|
0
|
—
|
Chiaki Furuya
|
Company Auditor
|
July 11, 1949
|
June 2017
|
June 2013
|
7,700
|
0.02%
|
Yasuhiro Akatsuka
|
Company Auditor
|
Feb. 10, 1947
|
June 2020
|
June 2016
|
0
|
—
|
Takashi Michishita
|
Company Auditor
|
Feb. 1, 1969
|
June 2020
|
June 2016
|
0
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_________
|
(1)
|
The number of IIJ shares owned as
of June 27, 2016.
|
|
(2)
|
Mr. Koichi Suzuki jointly owns IIJ
stocks through his wholly owned private company called KS Holdings which holds 1.73%
of the total company outstanding shares as of March 31, 2016.
|
|
(3)
|
Mr. Junichi Shimagami was a director
of the company from June 2007 to March 2010.
|
Koichi Suzuki
is one of the founders of IIJ
and has approximately 30 years of experience in the computer and communications industries. He was appointed as president,
representative director and Chief Executive Officer in April 1994. In June 2013, he became our chairman, representative director,
and Chief Executive Officer. In addition, Mr. Suzuki is chairman and president of hi-ho, and president of IIJ-EG and Multifeed.
He also serves as chairman of IIJ-America, and a director of IIJ-Global, Trinity and IIJ-II. From December 1992 to April
1994, Mr. Suzuki was a director of IIJ. Prior to joining us, Mr. Suzuki was employed at Japan Management Association where he served
as a general manager.
Eijiro Katsu
joined IIJ in November 2012 and
was appointed as president, representative director and Chief Operating Officer in June 2013. Prior to joining IIJ, he worked at
the Ministry of Finance in Japan and serviced as Vice Minister from July 2010 to August 2012.
Hideshi Hojo
joined IIJ in 1996. He has served
as senior managing director of IIJ since June 2006. Mr. Hojo is also a director of i-revo and NCJ. Since April 2014, he has been
in charge of Asian business development. From February 1998 to June 2000, Mr. Hojo acted as general manager of the Sales Division,
from June 2000 to June 2002 as a director and from June 2002 to 2006 as managing director. Prior to joining us, Mr. Hojo had 16
years of experience in the field of sales working for the Itochu Group.
Takeshi Kikuchi
was appointed as senior managing
director of IIJ in June 2010 and is serving as executive division director in charge of Business Unit (Sales Divisions). Mr. Kikuchi
joined Itochu Corporation in April 1983 and was temporarily seconded to IIJ from April 1996. In July 1999, Mr. Kikuchi joined IIJ-Tech
and was president of IIJ-Tech from October 2005 to March 2010.
Akihisa Watai
was appointed as managing director
of IIJ in June 2010 and is serving as division director of the Finance Division. Mr. Watai has served as chief financial officer
and chief accounting officer since June 2004. In addition, Mr. Watai is a director of NCJ, Trinity, Trust Networks and RYUKOSHA,
and a company auditor of i-revo, IIJ-Global and IIJ-II. From June 2004 to March 2010, Mr. Watai served as director of IIJ. Mr.
Watai joined The Sumitomo Bank, Limited (currently Sumitomo Mitsui Banking Corporation) in April 1989 and was temporarily seconded
to IIJ from August 1996. In February 2000, Mr. Watai joined IIJ permanently and has been general manager of the Finance Division
from April 2004 to March 2016.
Tadashi Kawashima
has served as a managing director
of IIJ since June 2015 and is serving as deputy executive division director in charge of Business Unit (Sales Divisions). Mr. Kawashima
joined NTT DATA Corporation in July 1988 and served as Senior Specialist of Public and Financial IT Service Company. Mr. Kawashima
served as President and Representative Director of NTT Data Tokai Corporation from June 2013 to June 2015.
Junichi Shimagami
has served as a director and Chief
Technology Officer of IIJ since June 2015 and is serving as division director in charge of Technology Unit (Technology Divisions)
since April 2016. Mr. Shimagami is also a director of Multifeed and hi-ho. Mr. Shimagami served as a director of the Company from
June 2007 to March 2010. Mr. Shimagami joined us in 1996. Prior to joining us, Mr. Shimagami worked at Nomura Research Institute,
Ltd., which he joined in April 1990.
Yasurou Tanahashi
has served as an outside director
of IIJ since June 2004. Mr. Tanahashi served as an advisor of NS Solutions Corporation, an affiliated company of Nippon Steel Corporation
from June 2007 to June 2009. Mr. Tanahashi had been president and representative director of NS Solutions Corporation since April
2000 and had been chairman of NS Solutions Corporation since April 2003.
Junnosuke Furukawa
has served as an outside
director of IIJ since June 2005. Mr. Furukawa has been an advisor or honorary advisor of The Furukawa Electric Co., Ltd since May
2005. From June 1995 to June 2003, Mr. Furukawa was president and CEO of The Furukawa Electric Co., Ltd. and from June 2003 to
June 2004, Mr. Furukawa was chairman and CEO of The Furukawa Electric Co., Ltd. Mr. Furukawa was a director, member of the board
and senior advisor of The Furukawa Electric Co., Ltd. from June 2004 to May 2005.
Shingo Oda
has served as an outside director of IIJ
since June 2008. From May 2005 to November 2007, Mr. Oda was president and representative director of Hewlett-Packard Japan, Ltd.
From February 2002 to May 2005, Mr. Oda was vice president and representative director of Hewlett-Packard Japan, Ltd.
Toshinori Iwasawa
was appointed as director
of IIJ in June 2013. Mr. Iwasawa has been president and representative director of IIJ-Global since September 2010. Prior to joining
IIJ-Global, he was a representative director at AT&T Japan LLC. and worked for IBM Japan from 1985.
Tadashi Okamura
has served as an outside director
of IIJ since June 2015. Mr. Okamura joined Toshiba Corporation in April 1962, and served as Chief Executive Officer of Toshiba
Corporation from June 2000 to June 2005 and as Chairman of Toshiba Corporation from June 2005 to June 2009. Mr. Okamura has been
serving as an adviser to the Board of Toshiba Corporation since June 2009 and became an honorary advisor to Toshiba Corporation
in June 2016.
Hiroki Watanabe
has served as an outside director
of IIJ since June 2015. Mr. Watanabe joined NTT in April 1976 and served as Representative Director and Senior Executive Vice President
of NTT from June 2012 to June 2014.
Kazuhiro Ohira
was appointed as company auditor
of IIJ in June 2010. Mr. Ohira is a company auditor of Trust Networks, NCJ, IIJ-Global, Trinity and RYUKOSHA. Mr. Ohira was General
Manager of International Business Management Dept. of Dai-Ichi Life Insurance Company, Ltd.
Chiaki Furuya
was appointed as an auditor
of IIJ in June 2013. Mr. Furuya joined us in October 2008 and has worked as a managing director and senior executive officer. Prior
to joining IIJ, he worked at NHK, Japan Broadcasting Corporation, from 1973 to 2007. He is also an auditor for IIJ-EG and hi-ho.
Yasuhiro Akatsuka
has been an outside company auditor
of IIJ since June 2016. Mr. Akatsuka is a Japanese Certified Public Accountant and joined Deloitte Haskins & Sells (currently
Deloitte Touche Tohmatsu LLC) in November 1972. Mr. Akatsuka left Deloitte Touche Tohmatsu LLC in September 2011 and has been serving
as senior technical director of The Japanese Institute of Certified Public Accountants.
Takashi Michishita
has been an outside company auditor
of IIJ since June 2016. Mr. Michishita admitted to the Tokyo Bar Association and joined Asahi Law Office (currently Nishimura &
Asahi LPC) in April 1994. Mr. Michishita has been a partner at Nishimura & Asahi LPC since July 2007.
The following table provides information about our executive officers
as of June 27, 2016.
Name
|
Position
and Major Responsibility
|
Kazuhiro Tokita
|
Senior Executive Officer
in charge of Financial System Business Division, Advanced Security Division and Health Care Business Department
|
|
|
Masayoshi Tobita
|
CISO, Managing Executive
Officer in charge of Administrative Division and General Manager of Business Unit Management Division
|
|
|
Kiyoshi Ishida
|
Managing Executive Officer in charge of Network Division
|
|
|
Naoshi Yoneyama
|
Managing Executive Officer in charge of Corporate Planning Division
|
|
|
Makoto Ajisaka
|
Managing Executive Officer in charge of Service Product Business Division
|
|
|
Yoshikazu Yamai
|
Managing Executive Officer in charge of Service Infrastructure Division
|
|
|
Yasumitsu Iizuka
|
Executive Officer in charge of Government, Public & Educational Organization Business Division
|
|
|
Koichi Maruyama
|
Executive Officer in charge of Global Business Division
|
|
|
Naoya Kaihara
|
Executive Officer in charge of West Japan Business Division
|
|
|
Seiji Okita
|
Executive Officer in charge of Outsourcing Division
|
|
|
Masakazu Tachikui
|
Executive Officer in charge of Cloud Division
|
|
|
Masami Kawamata
|
Executive Officer in charge of Accounting and General Manager of Accounting Department
|
The aggregate compensation to the IIJ’s directors and company
auditors during the fiscal year ended March 31, 2016 was as follows:
|
|
|
|
Breakdown
of Compensation (in millions of yen)
|
|
|
Position
|
|
Total
Compensation
|
|
Base
Salary
|
|
Stock
Option
|
|
Liability
for
Retirement
Benefit
|
|
Others
|
|
Number
of Persons
|
Directors *
|
|
¥
|
292
|
|
|
¥
|
256
|
|
|
¥
|
36
|
|
|
|
–
|
|
|
¥
|
0
|
|
|
|
9
|
|
Company Auditor **
|
|
|
18
|
|
|
|
16
|
|
|
|
–
|
|
|
¥
|
2
|
|
|
|
0
|
|
|
|
1
|
|
Outside Directors/ Outside Company Auditors
|
|
|
35
|
|
|
|
34
|
|
|
|
–
|
|
|
|
1
|
|
|
|
0
|
|
|
|
8
|
|
_________
|
(1)
|
Starting with its annual securities
report for the year ended March 31, 2010 filed with the Ministry of Finance, a Japanese
listed company is required to disclose the individual compensation of any director, executive
officer or corporate auditor if it is ¥100 million or more. For fiscal year ended
March 31, 2016, there was no director, executive officer or corporate auditor who received
compensation of over ¥100 million.
|
|
(2)
|
Upper limits on compensation for directors
and company auditors are determined at a general meeting of shareholders of the Company.
Within the upper limit approved by the shareholders' meeting, the Board of Company Auditors
will determine the amount of compensation for each company auditor.
|
|
(3)
|
Please see Item 6.E. “Share Ownership”
for more detailed information concerning our stock options.
|
* Excluding Outside Directors
** Excluding Outside Company Auditors
The retirement benefit plan for full-time directors of IIJ was
abolished in June 2011. We recorded a liability for retirement benefits for full-time directors of ¥380 million, which would
be required if they retire as of March 31, 2016. For a description of our stock option and warrant issuances to directors and employees,
see Item 6.E.
An amendment to the Corporation Law of Japan was enacted on June
20, 2014. The amended Corporation Law came into effect on May 1, 2015. From here on, “Corporation Law” refers to the
amended Corporation Law.
In accordance with the Corporation Law and our Articles of Incorporation,
our directors are elected at a general meeting of shareholders and our Board of Directors consists of minimum of 3 and maximum
of 14 directors. While the normal term of office of a director is two years, a director may serve any number of consecutive terms.
We do not have audit or remuneration committees, as is the standard practice in Japan. We do not have any service contracts with
any of our directors providing for benefits upon termination of their employment.
We have a Board of Company Auditors as well as an accounting auditor
who is an independent certified public accountant or an auditing corporation. In accordance with the Corporation Law and our Articles
of Incorporation, our Board of Company Auditors consists of a minimum of three company auditors, of whom at least half must be
from outside of the company, and company auditors are elected at a general meeting of shareholders. Currently, three of our four
company auditors are outside company auditors. While the normal term of office of a company auditor is four years, a company auditor
may serve any number of consecutive terms. Our company auditors are under a statutory duty to supervise the execution of duties
by the directors, to investigate proposals and documents to be submitted by the Board of Directors to the general meetings of shareholders
and report their opinions thereon to the shareholders, if necessary. They are required to attend meetings of the Board of Directors
and to express their opinions if necessary, but they are not entitled to vote. Each of our company auditors also have a statutory
duty to audit business reports and examine the audit report on our financial statements prepared by our accounting auditor, and
provide a report thereon to the entire Board of Company Auditors, which must, in turn, submit its audit report to the Board of
Directors and/or the general meetings of shareholders. The Board of Company Auditors will also determine matters relating to the
duties of company auditors, such as audit policy and methods of investigation of our affairs.
Following the requirements of the Corporation Law, we require a director
to obtain the approval of the Board of Directors in order for such director to accept a transfer of a product or any other asset
of IIJ, to transfer a product or any other asset of such director to IIJ, to receive a loan from IIJ, or to effect any other transaction
with IIJ, for himself or a third party.
If we issue common shares or other shares, stock acquisition rights
or bonds with stock acquisition rights under the Corporation Law, it is necessary for the Board of Directors to determine the conditions
of issuance. Additionally, (i) if the company issues such securities to persons other than shareholders (in the case of common
shares or other shares) at a specially favorable issue price or (in the case of stock acquisition rights or bonds with stock acquisition
rights) on specially favorable conditions, even if there are provisions related thereto in the Articles of Incorporation, some
matters related to such issuance are to be resolved by a special resolution of a shareholders’ meeting and (ii) if the company
issues such securities to persons other than shareholders whereby the persons will hold more than 50% of the voting rights of all
shareholders, the company is to provide notice (including public notice) to its shareholders in advance and if shareholders who
hold 10% or more of the voting rights of all shareholders provide notice to the company to dissent from such issuance of securities,
an approval by a resolution of a general meeting of shareholders is generally required before the payment date for such issuance
or transfer pursuant to the Corporation Law.
The rights of ADR holders, including their rights relating to corporate
governance practices, are provided in the deposit agreement which is an exhibit to this annual report.
Limitation
of Liabilities of some outside Directors and Auditors
As of June 30, 2016, we have entered into an agreement with five
of our outside directors, Mr. Junnosuke Furukawa, Mr. Shingo Oda, Mr. Tadashi Okamura, Mr. Yasurou Tanahashi and Mr. Hiroki Watanabe,
and two of our outside company auditors, Mr. Yasuhiro Akatsuka and Mr. Takashi Michishita that limits their liabilities to us for
damages suffered by us due to their acts taken in good faith and without gross negligence, amounting to ¥10 million or the
aggregate of the amounts set forth in Article 427 paragraph 1 of the Corporation Law, whichever is higher. Under the former Corporation
Law, we were allowed to enter into such agreements only with outside directors, outside auditors, accounting advisors and accounting
auditors, but under the Corporation Law, which amended the range of directors and company auditors that are allowed to be a party
to such agreements, we are allowed to enter with all directors (excluding those who are executive directors and who serve in certain
other roles in corporate governance.) (hereinafter referred to as “non-executive directors”) and all company auditors.
However, we have decided not to enter into such agreements with non-executive directors and company auditors other than our outside
directors and outside auditors above. For further discussion, see Item 10.C. Material Contracts and Exhibit 4.5 of this annual
report.
As of March 31, 2016, we had 2,980 employees, including employees
of our consolidated subsidiaries, and we had 2,835 employees as of March 31, 2015 and 2,353 employees as of March 31, 2014. The
following table shows the breakdown of the employees by main category of activity.
|
|
For
the fiscal year ended March 31,
|
|
|
2014
|
|
2015
|
|
2016
|
|
|
(number of employees)
|
Engineering
|
|
|
1,606
|
|
|
|
2,008
|
|
|
|
2,121
|
|
Sales
|
|
|
440
|
|
|
|
501
|
|
|
|
516
|
|
Administration
|
|
|
307
|
|
|
|
326
|
|
|
|
343
|
|
We have never experienced any labor disputes and consider our labor
relations to be good. To our knowledge, none of our employees are members of any union.
The information on share ownership required by this item is in
Item 6.A. “Directors and Senior Management” above.
Stock
Option Plan
Stock compensation–type stock option
.
A stock compensation-type stock option is a stock acquisition
right entitling its holder to acquire shares upon the exercise of a stock acquisition right at an exercise price of one yen (
¥1)
per share. Stock compensation-type stock options are allocated to directors and executive officers as a substitution for
the retirement allowance planned for them and to further motivate and incentivize them to enhance IIJ’s middle- to long-term
business performance and corporate value. On May 26, 2011, IIJ’s board of directors resolved to introduce stock compensation–type
stock options for executive officers of IIJ. On June 28, 2011, IIJ’s ordinary general meeting of shareholders approved the
introduction of stock compensation type stock options for directors of IIJ.
|
1st
Series (issued in July 2011)
|
2nd
Series (issued in July 2012)
|
(1)
Total number of Stock Acquisition Rights:
|
138 rights
|
130 rights
|
(2)
Class and total number of shares underlying the Stock Acquisition Rights:
|
27,600 shares of the
Company’s common stock (The number of shares to be issued or transferred for each Stock Acquisition Rights shall be
200 shares. This number is adjusted from 1 share to 200 shares due to the effect of the stock split conducted on October 1,
2012)
|
26,000 shares of the
Company’s common stock (The number of shares to be issued or transferred for each Stock Acquisition Rights shall be
200 shares. This number is adjusted from 1 share to 200 shares due to the effect of the stock split conducted on October 1,
2012)
|
(3)
Amount to be paid in exchange for the Stock Acquisition Rights:
|
¥259,344 per option
(The fair value of stock acquisition rights used to recognize compensation expense was estimated using the Black-Scholes option-pricing
model)
|
¥318,562 per option.
(The fair value of stock acquisition rights used to recognize compensation expense was estimated using the Black-Scholes option-pricing
model)
|
(4)
Exercise period of stock acquisition rights:
|
From July 15, 2011
to July 14, 2041
|
From July 14, 2012
to July 13, 2042
|
(5)
Position and number of persons to be allotted the stock acquisition rights and the number of stock acquisition rights to be
allotted:
|
- Directors
(excluding Part-time and Outside Directors) of IIJ: 6 Directors, 89 rights
- Executive
Officers of IIJ: 8 Executive Officers, 49 rights
|
- Directors
(excluding Part-time and Outside Directors) of IIJ: 6 Directors, 74 rights
- Executive
Officers of IIJ: 11 Executive Officers, 56 rights
|
|
3rd
Series (issued in July 2013)
|
4th
Series (issued in July 2014)
|
(1)
Total number of Stock Acquisition Rights:
|
89 rights
|
128 rights
|
(2)
Class and total number of shares underlying the Stock Acquisition Rights:
|
17,800 shares of the
Company’s common stock (The number of shares to be issued or transferred for each Stock Acquisition Rights shall be
200 shares)
|
25,600 shares of the
Company’s common stock (The number of shares to be issued or transferred for each Stock Acquisition Rights shall be
200 shares)
|
(3)
Amount to be paid in exchange for the Stock Acquisition Rights:
|
¥647,000 per option.
(The fair value of stock acquisition rights used to recognize compensation expense was estimated using the Black-Scholes option-pricing
model)
|
¥422,600 per option.
(The fair value of stock acquisition rights used to recognize compensation expense was estimated using the Black-Scholes option-pricing
model)
|
(4)
Exercise period of stock acquisition rights:
|
From July 12, 2013
to July 11, 2043
|
From July 11, 2014
to July 10, 2044
|
(5)
Position and number of persons to be allotted the stock acquisition rights and the number of stock acquisition rights to be allotted:
|
- Directors
(excluding Part-time and Outside Directors) of IIJ: 7 Directors, 60 rights
- Executive
Officers of IIJ: 10 Executive Officers, 29 rights
|
- Directors
(excluding Part-time and Outside Directors) of IIJ: 7 Directors, 88 rights
- Executive
Officers of IIJ: 10 Executive Officers, 40 rights
|
|
5th
Series (issued in July 2015)
|
|
(1)
Total number of Stock Acquisition Rights:
|
151 rights
|
|
(2)
Class and total number of shares underlying the Stock Acquisition Rights:
|
30,200 shares of the
Company’s common stock (The number of shares to be issued or transferred for each Stock Acquisition Rights shall be
200 shares)
|
|
(3)
Amount to be paid in exchange for the Stock Acquisition Rights:
|
¥369,200 per option.
(The fair value of stock acquisition rights used to recognize compensation expense was estimated using the Black-Scholes option-pricing
model)
|
|
(4)
Exercise period of stock acquisition rights:
|
From July 14, 2015
to July 13, 2045
|
|
(5)
Position and number of persons to be allotted the stock acquisition rights and the number of stock acquisition rights to be allotted:
|
- Directors
(excluding Part-time and Outside Directors) of IIJ: 7 Directors, 100 rights
- Executive
Officers of IIJ: 11 Executive Officers, 51 rights
|
|
6th Series (To be issued in July 2016)
|
|
(1)
|
Maximum number of Stock Acquisition Rights to be determined on July 11, 2016: 241 rights
|
|
(2)
|
Class of shares underlying the Stock Acquisition Rights, the Company’s common stock and the total number of shares underlying the Stock Acquisition Rights to be determined accordingly with the number of stock acquisition rights to be allotted (The number of shares to be issued or transferred for each Stock Acquisition Rights shall be 200 shares)
|
|
(3)
|
Amount to be paid in exchange for the Stock Acquisition Rights is to be determined on July 11, 2016 based on the fair value of stock acquisition rights used to recognize compensation expense was estimated using the Black-Scholes option-pricing model.
|
|
(4)
|
Exercise period of stock acquisition rights: From July 12, 2016 to July 11, 2046.
|
|
(5)
|
Position and number of persons to be allotted the stock acquisition rights and the maximum number of stock acquisition rights to be allotted:
|
|
|
(i)
|
Directors (excluding Part-time and Outside Directors) of IIJ: 7 Directors, 157 rights
|
|
|
(ii)
|
Executive Officers of IIJ: 12 Executive Officers, 84 rights
|
Class and total number of shares to be acquired by exercising stock acquisition rights outstanding, as of March 31,
2016, is as follows:
|
1st Series
(issued
in July
2011)
|
2nd Series
(issued
in July
2012)
|
3rd Series
(issued
in July
2013)
|
4th Series
(issued
in July
2014)
|
5th Series
(issued
in July
2015)
|
Outstanding:
Class and total
number
of shares to be acquired
|
Common
stock
21,400
shares
|
Common
stock
20,800
shares
|
Common
stock
15,600
shares
|
Common
stock
23,400
shares
|
Common
stock
30,200
shares
|
Employee
Stock Purchase Plan
The Group Employee Stock Purchase Plan, which was implemented in
December 1995, provides designated employees with the opportunity to purchase shares at market value. Shares are basically held
in the name of the group employee stock purchase program until employees leave the association, due to resignation or retirement.
The representative of the employee shareholders' association exercises voting rights in accordance with the instructions of each
employee shareholder. As of March 31, 2016, the association holds 443,500 shares of common stock, or 0.94% of our outstanding shares.
Director
Stock Purchase Plan
The Director Stock Purchase Plan was implemented in November 2007.
On April 1, 2010, the plan was amended in connection with the introduction of the Executive Officer System. The plan provides designated
directors and executive officers of IIJ and its wholly-owned subsidiaries in Japan with the opportunity to purchase IIJ common
shares at market value, every month, with a fixed amount of their own money through a designated security broker.
Item 7. Major Shareholders and Related Party Transactions
A.
Major Shareholders
The following table shows information regarding beneficial ownership
of our common stock as of March 31, 2016 by each shareholder known by us to own beneficially more than 5% of our common stock and
all directors and executive officers as a group. We are not required by Japanese law to disclose beneficial ownership of our common
stock. As explained in “Reporting Requirements of Shareholders—Report of Substantial Shareholdings” in Item 10.B.
of this annual report on Form 20-F, any person who becomes, beneficially and solely or jointly, a holder of more than 5% of
our outstanding common stock must file a report with the relevant local finance bureau of the Ministry of Finance. The information
in this table is based upon our shareholders of record and reports filed with the Financial Services Agency and the SEC.
|
|
Outstanding
Voting Shares
as
of March 31, 2016
(4)
|
|
|
Number
|
|
Percentage
|
Nippon Telegraph and Telephone Corporation and affiliates
(1)
|
|
|
12,135,000
|
|
|
|
26.4
|
%
|
Koichi Suzuki
(2)
|
|
|
2,623,900
|
|
|
|
5.7
|
|
Directors, executive officers and company auditor as a group
(3)
|
|
|
2,883,600
|
|
|
|
6.3
|
|
__________
|
(1)
|
Includes NTT, which owned 10,095,000
shares, or 22.0% of our outstanding voting shares and 21.6% of our total issued shares,
and NTT Communications, which owned 2,040,000 shares, or 4.4% of our outstanding voting
shares and 4.4% of our total issued shares.
|
|
(2)
|
Mr. Koichi Suzuki directly held 3.9%
of our outstanding voting shares and 1.8% indirectly through his wholly owned private
company called KS Holdings.
|
|
(3)
|
Includes Koichi Suzuki’s holdings
which are also separately set forth above. No other director or executive officer except
for Koichi Suzuki was a beneficial owner of more than 5%.
|
|
(4)
|
As of March 31, 2016, the Company held
758,709 shares of the Company as treasury stock.
|
Our major shareholders have the same voting rights as other holders
of our common stock.
According to our register of shareholders, as of March 31, 2016,
there were 7,836 holders of common stock of record worldwide. As of March 31, 2016, The Bank of New York Mellon, depositary for
our ADSs, held 2.2% of the outstanding common stock on that date. According to The Bank of New York Mellon, as of March 31, 2016,
there were 1,753 ADR holders of record with addresses in the United States. Because some of these shares were held by brokers or
other nominees, the number of record holders with addresses in the United States might not fully show the number of beneficial
owners in the United States. Of the 46,711,400 shares of common stock outstanding as of March 31, 2016, 1,016,198 shares were
held in the form of 2,032,396 ADSs. As of March 31, 2016, the Company held 758,709 shares of the Company as treasury stock.
To the knowledge of the Company, it is not directly or indirectly
owned or controlled by any other corporation, by any government, or by any other natural or legal person or persons severally or
jointly. As far as is known to the Company, there are no arrangements, the operation of which may at a subsequent date, result
in a change in control of IIJ.
B.
Related Party Transactions
NTT-affiliated Companies
.
The Company entered into a number of different types of transactions with NTT and its subsidiaries including
purchases of wireline telecommunication services for the Company’s offices and capital lease arrangements. On an ongoing
basis in the ordinary course of business, for the Company’s connectivity and outsourcing services, the Company purchases
international and domestic backbone services, local access lines, rental rack space in data centers and mobile services from NTT
and its subsidiaries. The Company sells to NTT and its subsidiaries its services, systems integration services and monitoring services
for their data centers. For the fiscal year ended March 31, 2016, we
have spent ¥23.0 billion
in the aggregate for international and domestic backbone, local access line, mobile connectivity costs, lines for WAN services
and co-location costs to NTT and its subsidiaries such as NTT Communications, NTT East, NTT West and NTT Docomo. As of March 31,
2016 we had ¥1.8 billion of lease obligations with NTT FINANCE.
All the transactions entered into with NTT and its affiliates are
entered in the ordinary course of business. Mr. Kawashima, one of our directors, was an employee of NTT DATA Corporation and was
Representative Director of NTT DATA TOKAI Corporation, and Mr. Watanabe, one of our outside directors, was Representative Director
and Senior Executive Vice President of NTT from June 2012 to June 2014. There is no shareholders’ agreement in place with
NTT, its affiliates or any other party for the appointment of any of our directors.
Transactions with equity method affiliates.
In the
ordinary course of business, we have various sales, purchase and other transactions with companies which are owned 20% to 50% by
us and are accounted for by the equity method. Account balances and transactions with such 20% to 50% owned companies as of and
for the fiscal year ended March 31, 2016 are presented as follows:
|
|
millions
of yen
|
Accounts receivable
|
|
¥
|
122
|
|
Accounts payable
|
|
|
47
|
|
Revenues
|
|
|
659
|
|
Costs and Expenses
|
|
|
502
|
|
Transactions with Outside Directors and Auditors.
On
June 25, 2014, we entered into agreements on limited liability with Mr. Yasurou Tanahashi and Mr. Shingo
Oda as our outside directors. On June 26, 2015 we entered into additional agreements on limited liability with Mr. Tadashi Okamura,
Mr. Hiroki Watanabe, and Mr. Junnosuke Furukawa. On June 24, 2016 we entered into an additional agreement on limited liability
with Mr. Yasuhiro Akatsuka and Mr. Takashi Michishita as our outside auditors, pursuant to which their liability for damages sustained
by us as a result of their actions is limited to an aggregate of ¥10 million. For further discussion, see Item 10.C. Material
Contracts and Exhibit 4.5 of this annual report.
See Note 22 “Related Party Transactions” and Note 6
“Investments in Equity Method Investees” to our consolidated financial statements, included in this annual report
on Form 20-F.
C.
Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
Financial Statements
The consolidated financial statements required by this item begin
on page F-1.
Legal or Arbitration Proceedings
The information on legal or arbitration proceedings required by
this item is in Item 4.B.
Dividend Policy
Our basic dividend policy is that we pay dividends to our shareholders
continuously and in a stable manner while considering the need to have retained earnings for the enhancement of financial position,
middle-to long-term business expansion, future business investment and other goals. Under Japanese law, a company is required to
have retained earnings, without accumulated deficit, in order to be able to conduct certain types of capital-related transactions
such as payments of dividends in general. The ordinary general meeting of shareholders held in June 2006 approved the elimination
of accumulated deficit through the reduction of additional-paid in capital and common stock in our non-consolidated financial statements
under generally accepted accounting principles in Japan. For the fiscal year ended March 31, 2016, IIJ paid total cash dividend
of ¥22.00 per share of common stock.
B. Significant Changes
Except as otherwise disclosed in this annual report on Form 20-F,
there has been no significant change in our financial condition since March 31, 2016, the date of our last audited financial
statements.
Item 9. The Offer and Listing
|
A.
|
Offer and Listing Details
|
ADSs representing our common stock have been quoted on the NASDAQ
market since August 4, 1999 under the symbol “IIJI” and were transferred from the NASDAQ Global Market to the
NASDAQ Global Select Market on June 11, 2007. The current ADS/share ratio is 2 ADSs per 1 share of our common stock. Our shares
of common stock had been quoted on the Mothers market of the TSE since December 2, 2005 under the stock code number “3774”
and were transferred to the First Section of the TSE on December 14, 2006.
The following table shows, for the periods indicated, the high
and low price of our ADSs and shares of common stock on the TSE for the periods indicated:
|
|
NASDAQ
(1)
(per ADS)
|
|
TSE
(1) (2)
(per
share of common stock)
|
Fiscal year
ended/ending March 31,
|
|
High
|
|
Low
|
|
High
|
|
Low
|
2011
|
|
$
|
8.37
|
|
|
$
|
5.08
|
|
|
¥
|
1,460
|
|
|
¥
|
815
|
|
2012
|
|
|
11.78
|
|
|
|
6.67
|
|
|
|
1,830
|
|
|
|
1,128
|
|
2013
|
|
|
17.30
|
|
|
|
8.24
|
|
|
|
3,300
|
|
|
|
1,326
|
|
2014
|
|
|
21.21
|
|
|
|
8.71
|
|
|
|
4,365
|
|
|
|
1,797
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
12.95
|
|
|
|
10.11
|
|
|
|
2,700
|
|
|
|
2,048
|
|
Second Quarter
|
|
|
12.62
|
|
|
|
9.61
|
|
|
|
2,589
|
|
|
|
2,046
|
|
Third Quarter
|
|
|
10.92
|
|
|
|
7.56
|
|
|
|
2,647
|
|
|
|
1,802
|
|
Fourth Quarter
|
|
|
10.93
|
|
|
|
8.07
|
|
|
|
2,657
|
|
|
|
1,941
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
10.01
|
|
|
|
7.78
|
|
|
|
2,175
|
|
|
|
1,910
|
|
Second Quarter
|
|
|
10.20
|
|
|
|
8.00
|
|
|
|
2,554
|
|
|
|
2,002
|
|
Third Quarter
|
|
|
10.29
|
|
|
|
8.01
|
|
|
|
2,508
|
|
|
|
1,987
|
|
Fourth Quarter
|
|
|
10.92
|
|
|
|
8.62
|
|
|
|
2,489
|
|
|
|
1,995
|
|
Month
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2016
|
|
|
10.49
|
|
|
|
8.62
|
|
|
|
2,489
|
|
|
|
1,995
|
|
February 2016
|
|
|
10.24
|
|
|
|
9.05
|
|
|
|
2,331
|
|
|
|
2,007
|
|
March 2016
|
|
|
10.92
|
|
|
|
9.99
|
|
|
|
2,438
|
|
|
|
2,243
|
|
April 2016
|
|
|
11.12
|
|
|
|
9.54
|
|
|
|
2,322
|
|
|
|
2,081
|
|
May 2016
|
|
|
11.13
|
|
|
|
9.81
|
|
|
|
2,464
|
|
|
|
2,107
|
|
June
2016 (through June 24, 2016)
|
|
|
11.00
|
|
|
|
9.24
|
|
|
|
2,449
|
|
|
|
1,901
|
|
___________
(1) Price data are based
on prices throughout the sessions for each corresponding period at each stock exchange.
(2) We conducted a 1 to
200 stock split on common stock with an effective date of October 1, 2012. The figures are retroactively adjusted to reflect the
stock split.
Not applicable.
ADSs representing our common stock have been quoted on the NASDAQ
market since August 4, 1999 under the symbol “IIJI” and on June 11, 2007 were transferred from the NASDAQ Global Market
to the NASDAQ Global Select Market. Our shares of common stock have been quoted on the Mothers market of the TSE since December
2, 2005 under the stock code number “3774” and were transferred to the First Section of the TSE on December 14, 2006.
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the issue
Not applicable.
Item 10. Additional Information
A.
Share Capital
Not required.
B.
Memorandum and Articles of Association
Organization
IIJ is a joint stock corporation (kabushiki kaisha) incorporated
in Japan under the Corporation Law. It is registered in the Commercial Register (shogyo tokibo) maintained by the Tokyo Legal Affairs
Bureau and several other registry offices of the Ministry of Justice.
Objects and Purposes in Our
Articles of Incorporation
Article 2 of our Articles of Incorporation states our objects
and purposes:
|
·
|
Telecommunications business under the Telecommunications Business Law,
|
|
·
|
Processing, mediation and provision of information and contents by using telecommunications networks,
|
|
·
|
Agency for the management business such as the management of networks and the management of information and telecommunications
systems,
|
|
·
|
Planning, consulting service, development, operation and maintenance of or for information and telecommunications systems,
|
|
·
|
Development, sales, lease and maintenance of computer software,
|
|
·
|
Development, sales, lease and maintenance of telecommunications machinery and equipment,
|
|
·
|
Telecommunications construction,
|
|
·
|
Agency for non-life insurance,
|
|
·
|
Research, study, education and training related to the foregoing, and
|
|
·
|
Any and all businesses incidental or related to the foregoing.
|
Provisions Regarding Our Directors
There is no provision in our Articles of Incorporation as to a
director’s power to vote on a proposal, arrangement or contract in which the director is materially interested, but the Corporation
Law provides that such director is required to refrain from voting on such matters at the Board of Director’s meetings.
The Corporation Law provides that compensation for directors is
determined at a general meeting of shareholders of a company. Within the upper limit approved by the shareholders' meeting, the
Board of Directors will determine the amount of compensation for each director. The Board of Directors may, by its resolution,
leave such decision to the president’s discretion.
The Corporation Law provides that a significant loan from a third
party to a company should be approved by the Board of Directors. Our regulations of the Board of Directors have adopted this policy.
There is no mandatory retirement age for directors under the Corporation
Law or our Articles of Incorporation.
There is no requirement concerning the number of shares one individual
must hold in order to qualify him or her as a director under the Corporation Law or our Articles of Incorporation.
Rights of Shareholders of our
Common Stock
We have issued only one class of shares, our common stock. Rights
of holders of shares of our common stock have under the Corporation Law and our Articles of Incorporation include:
|
·
|
the right to receive dividends when the payment of dividends has been approved at a shareholders' meeting, with this right
lapsing three full years after the due date for payment according to a provision in our Articles of Incorporation,
|
|
·
|
the right to receive interim dividends as provided for in our Articles of Incorporation, with this right lapsing three full
years after the due date for payment according to a provision in our Articles of Incorporation,
|
|
·
|
the right to vote at a shareholders' meeting (cumulative voting is not allowed under our Articles of Incorporation),
|
|
·
|
the right to receive surplus in the event of liquidation, and
|
|
·
|
the right to require us to purchase shares subject to certain requirements under the Corporation Law when a shareholder opposes
certain resolutions including (i) the transfer of all or material part of the business, (ii) an amendment of the Articles of Incorporation
to establish a restriction on share transfer, (iii) a share exchange or share transfer to establish a holding company, (iv) company
split or (v) merger, all of which must, in principle, be approved by a Special Resolution of Shareholders’ meeting.
|
Under the Corporation Law, a company is permitted to make distribution
of surplus to the extent that the aggregate book value of the assets to be distributed to shareholders does not exceed the Distributable
Amount provided for under the Corporation Law and the Ordinance of the Ministry of Justice as of the effective date of such distribution
of surplus.
The amount of surplus at any given time shall be the amount of
a company’s assets and the book value of company’s treasury stock after subtracting and adding the amounts of the items
provided for under the Corporation Law and the applicable Ordinance of the Ministry of Justice.
So long as we maintain the unit share system (see “–Unit
share system” below; currently, 100 shares of Common Stock constitute one unit), a holder of shares constituting one or more
full units is generally entitled to one vote per one unit of our shares at a shareholders’ meeting. In general, under the
Corporation Law and our Articles of Incorporation, a shareholders’ meeting may adopt a resolution by a majority of the voting
rights represented at the meeting. The Corporation Law and our Articles of Incorporation require a quorum for the election of directors
and company auditors of not less than one-third of the total number of voting rights held by all shareholders who can exercise
their voting rights. A corporate shareholder, having more than one-quarter of its voting rights directly or indirectly held by
us, does not have voting rights. We have no voting rights with respect to our own common stock. Shareholders may exercise their
voting rights through proxies, provided that a shareholder may appoint only one shareholder who has a voting right as its proxy.
Our Board of Directors may entitle our shareholders to cast their votes in writing. Our Board of Directors may also entitle our
shareholders to cast their votes by electrical devices.
While the Corporation Law, in general, requires a quorum of the
majority of voting rights and approval of two-thirds of the voting rights presented at the meeting of any material corporate actions,
it allows a company to reduce the quorum for such Special Resolutions by its Articles of Incorporation to not less than one-third
of the total number of voting rights held by all shareholders who can exercise their voting rights. We adopted a quorum of not
less than one-third of the total number of voting rights in our Articles of Incorporation for Special Resolutions for material
corporate actions, such as:
|
·
|
a reduction of the stated capital (except when a company reduces the stated capital within certain amount provided for under
the Corporation Law concurrently with a share issue),
|
|
·
|
amendment of our Articles of Incorporation (except amendments that the Board of Directors are authorized to make under the
Corporation Law),
|
|
·
|
establishment of a 100% parent-subsidiary relationship through a share exchange or share transfer requiring shareholders’
approval,
|
|
·
|
a dissolution, merger or consolidation requiring shareholders’ approval,
|
|
·
|
a company split requiring shareholders’ approval,
|
|
·
|
a transfer of (i) the whole or an important part of our business, or (ii) the whole or a part of our shares in any of our subsidiaries,
|
|
·
|
the taking over of the whole of the business of any other corporation requiring shareholders’ approval, and
|
|
·
|
issuance of new shares at a specially favorable price, or issuance of stock acquisition rights or bonds with stock acquisition
rights with specially favorable conditions to persons other than shareholders.
|
The Corporation Law provides additional specific rights for shareholders
owning a substantial number of voting rights.
Shareholders holding 10% or more of the total number of voting
rights of all shareholders (or our total outstanding shares) have the right to apply to a court of competent jurisdiction, or competent
court, for:
|
·
|
commencement of reorganization proceedings as provided for in the Company Reorganization Law of Japan.
|
Shareholders holding 10% or more of the total number of voting rights
of all shareholders have the right to dissent from a third-party allotment of securities (including common shares or other shares,
stock acquisition rights or bonds with stock acquisition rights) that will give the third-party more than 50% of the voting rights
of all shareholders and also have the right to demand approval by a resolution of a general meeting of shareholders.
Shareholders who have held 3% or more of the total number of voting
rights of all shareholders (or our total outstanding shares) for six months or more have certain rights under the Corporation Law
which includes the rights to:
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demand the convening of a general meeting of shareholders,
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apply to a competent court for removal of a director or company auditor,
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apply to a competent court for removal of a liquidator, and
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apply to a competent court for an order to inspect our business and assets in a special liquidation proceeding.
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Shareholders holding 3% or more of the total number of voting rights
of all shareholders (or our total outstanding shares) have certain rights under the Corporation Law which include the rights to:
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examine our accounting books and documents and make copies of them, and
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apply to a competent court for appointment of an inspector to inspect our operation or financial condition.
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Shareholders who have held 1% or more of the total number of voting
rights of all shareholders for six months or more have the right to:
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apply to a competent court for appointment of an inspector to review the correctness of the convocation and voting procedures
of a general meeting of shareholders, and
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demand that we take action against the officers of our wholly owned subsidiaries to hold such officers liable.
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Shareholders who have held 1% or more of the total number of voting
rights of all shareholders or 300 voting rights for six months or more have the right to demand that certain matters be made objects
and added to the agenda items at a general meeting of shareholders.
Shareholders who have held any number of shares for six months
or more have the right to demand that we take certain actions under the Corporation Law which include the rights to demand:
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the institution of an action to enforce the liabilities of our directors or company auditors,
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the institution of an action to recover from a recipient the benefit of a proprietary nature given in relation to the exercise
of the right of a shareholder, and
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a director on our behalf for the cessation of an illegal or ultra vires action.
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There is no provision under the Corporation Law or our Articles
of Incorporation which forces shareholders to make additional contributions when requested by us.
Under the Corporation Law, in order to change the rights of shareholders
which are stipulated and defined in our Articles of Incorporation, we must amend our Articles of Incorporation. Amendments must,
in principle, be approved by a Special Resolution of shareholders.
Annual general meetings and extraordinary general meetings of shareholders
are convened by a representative director based on the determination of our Board of Directors. A shareholder having held 3% or
more of our total outstanding shares for six months or more is entitled to demand the directors to convene a shareholders' meeting
under the Corporation Law. So long as we maintain the unit share system, shareholders who are registered as the holders of one
or more full units of shares in our registers of shareholders at the end of each March 31 have the right to attend the annual
general meeting of our shareholders. We may, by prescribing a Record Date, determine the shareholders who are stated or recorded
in the shareholder registry on the Record Date as the shareholders entitled to extraordinary general meetings of our shareholders,
and in this case, we are required to make a public notice of Record Date at least two weeks prior to the Record Date. A convocation
notice will be sent to these shareholders at least two weeks prior to the date of the shareholders' meeting.
Acquisition of Own Shares
Under applicable laws of Japan, we may acquire our own shares:
(i) through market transactions on a stock exchange on which
our shares are listed or by way of tender offer (in either case pursuant to a resolution of the Board of Directors as currently
authorized by our Articles of Incorporation);
(ii) from a specific shareholder other than any of our subsidiaries
(pursuant to a special resolution of a general meeting of shareholders); or
(iii) from any of our subsidiaries (pursuant to a resolution
of the Board of Directors).
In case the acquisition is made by way of (ii) above, any other
shareholder may request within a certain period of time provided under the applicable Ordinance of the Ministry of Justice before
a general meeting of shareholders that we also purchase our shares held by the requesting shareholder, unless the purchase price
or any other consideration to be delivered in exchange for the acquisition of one of our shares does not exceed the market price
of one of our shares calculated by the method prescribed in the applicable Ordinance of the Ministry of Justice.
Any acquisition by us of our own shares must satisfy certain other
requirements, including that the total amount of the acquisition price may not exceed the Distributable Amount, as described above.
We may hold the shares which we acquired by way of (i) through
(iii) above, and may cancel such shares by a resolution of the Board of Directors. We may also dispose of such shares subject to
a resolution of the Board of Directors and subject also to other requirements applicable to the issuance of shares under the Corporation
Law.
Unit share system
Our Articles of Incorporation provide that 100 shares of Common
Stock constitute one unit of shares. Although the number of shares constituting one unit is included in the Articles of Incorporation,
any amendment to the Articles of Incorporation reducing (but not increasing) the number of shares constituting one unit or eliminating
the provisions for the unit of shares may be made by a resolution of the Board of Directors rather than by a special shareholders’
resolution, which is otherwise required for amending the Articles of Incorporation. The number of shares constituting one new unit,
however, cannot exceed 1,000 or 0.5 percent of the total number of issued shares, whichever is greater.
Under the unit share system, shareholders shall have one voting
right for each unit of shares that they hold. Any number of shares less than a full unit carries no voting rights.
A holder of shares of Common Stock constituting less than a full
unit may require us to purchase such shares at their market value in accordance with the provisions of our share handling regulations.
In addition, our Articles of Incorporation provide that a holder of shares of Common Stock constituting less than a full unit may
request us to sell to such holder such amount of shares of Common Stock that will, when added together with the shares of Common
Stock constituting less than a full unit, constitute a full unit of shares, in accordance with the provisions of our share handling
regulations.
A holder who owns ADRs evidencing less than 200 ADSs will indirectly
own less than one full unit of shares of Common Stock. Although, as discussed above, under the unit share system, holders of less
than one full unit have the right to require us to purchase their shares or sell shares held by us to such holders, holders of
ADRs evidencing ADSs that represent other than integral multiples of full units are unable to withdraw the underlying shares of
Common Stock representing less than one full unit and, therefore, are unable, as a practical matter, to exercise the rights to
require us to purchase such underlying shares or sell shares held by us to such holders. As a result, access to the Japanese markets
by holders of ADRs through the withdrawal mechanism will not be available for dispositions of shares of Common Stock in lots less
than one full unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any
size.
Restrictions on Holders of our Common Stock
There is no restriction on non-resident or foreign shareholders
on the holding of our shares or on the exercise of voting rights, except for filing requirements with respect to an acquisition
of shares by Non-resident of Japan under The Foreign Exchange and Foreign Trade Act of Japan and related rules and regulations,
as explained in Item 10.D (Exchange Controls). However, pursuant to a provision of our share handling regulations, a shareholder
who does not have an address or residence in Japan is required to file its temporary address to receive notices in Japan or that
of a standing proxy having any address or residence in Japan with our transfer agent.
There is no provision in our Articles of Incorporation that would
have the effect of delaying, deferring or preventing a change in control that would operate only with respect to a merger, acquisition
or corporate restructuring involving us.
There is no provision in our Articles of Incorporation or other
subordinated rules regarding the ownership threshold, above which shareholder ownership must be disclosed. Pursuant to the Financial
Instruments and Exchange Law of Japan and its related regulations, a shareholder who has become, solely or jointly, a holder of
more than 5% of the total issued shares in a company that is listed on any stock exchange in Japan is required to file a report
with the Finance Bureau of the Ministry of Finance, and, with certain exceptions, a similar report must also be filed in respect
of any subsequent change of 1% or more in the holding or of any change in material matters set forth in any previously filed report.
There is no provision in our Articles of Incorporation governing
changes in the capital more stringent than is required by law.
For a description of rights of holders of ADSs, please see the
“Description of American Depositary Receipts” section in our Form F-1 Registration Statement (File No. 333-10584),
declared effective on August 3, 1999, as amended, hereby incorporated by reference.
The following are summaries of our material contracts, other than
those we entered into in the ordinary course of business.
Solutions Engagement Agreement.
IIJ
Global entered into a Solutions Engagement Agreement on June 1, 2010, between IBM Japan. The Solutions Engagement Agreement, which
contains indemnification, establishes the basis for a procurement relationship between IIJ-Global and IBM Japan, the largest sales
partner of IIJ-Global. IIJ-Global will provide and perform services, functions, responsibilities and others in a way that were
being provided and performed by AT&T Japan. This agreement will remain in effect until terminated. The Solutions Engagement
Agreement is filed as Exhibit 4.7 of this annual report.
Limitation of Liability Agreements, dated June 26,
2015 and June 24, 2016 between IIJ and outside directors and outside company auditors.
We entered into a Limitation of
Liability Agreement with Mr. Junnosuke Furukawa, Mr. Tadashi Okamura and Mr. Hiroki Watanabe as outside directors on June 26, 2015
and with Mr. Yasurou Tanahashi and Mr. Shingo Oda as outside directors and with Mr. Yasuhiro Akatsuka and Mr. Takashi Michishita
as outside company auditors on June 24, 2016 respectively, under which we limit the liability of outside directors in accordance
with the rules defined in Article 427 of the Corporation Law. Under the terms of the agreements on limited liability, the liability
of outside directors for damages sustained by us as a result of their actions is limited to an aggregate of ¥10 million or
the aggregate of the amounts set forth in Article 427 paragraph 1 of the Corporation Law, whichever is higher. The agreements on
limited liability are automatically renewed if the outside directors and auditors are re-elected and terminate when the outside
directors, subject to the agreements on limited liability, lose the status of outside director, i.e., become a director, executive
officer or employee of the company. The full English translation of the Agreement on Limited Liability is filed as Exhibit 4.5
of this annual report.
The Foreign Exchange and Foreign Trade Act of Japan, as amended
and the cabinet orders and ministerial ordinances thereunder (the “Foreign Exchange Regulations”), regulate certain
transactions involving a “Non-resident of Japan” or a “Foreign Investor,” including the issuance of securities
by a resident of Japan outside of Japan, transfer of securities between a resident of Japan and a Non-resident of Japan, “inward
direct investment” by a Foreign Investor, and a payment from Japan to a foreign country or by a resident of Japan to a Non-resident
of Japan.
“Non-residents of Japan” is defined as individuals
who are not resident in Japan and corporations whose principal offices are located outside of Japan. Generally, branches and other
offices of Japanese corporations which are located outside of Japan are regarded as Non-residents of Japan, but branches and other
offices of non-resident corporations which are located within Japan are regarded as residents of Japan.
“Foreign Investors” is defined as:
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individuals who are Non-residents of Japan;
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corporations which are organized under the laws of foreign countries or whose principal offices are located outside of Japan;
and
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corporations (i) of which 50% or more of their voting rights are held by individuals who are Non-residents of Japan and/or
corporations which are organized under the laws of foreign countries or whose principal offices are located outside of Japan or
(ii) a majority of whose officers, or officers having the power of representation, are individuals who are Non-residents of Japan.
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Under the Foreign Exchange Regulations, dividends paid on, and
the proceeds of sales in Japan of, shares held by Non-residents of Japan may in general be converted into any foreign currency
and repatriated abroad.
Under the Foreign Exchange Regulations, in general, a Non-resident
of Japan who acquires shares from a resident of Japan is not subject to any prior filing requirement, although the Foreign Exchange
Law empowers the Minister of Finance of Japan to require prior approval for any such acquisition in certain limited circumstances.
While such prior approval is not required in general, in the case where a resident of Japan transfers shares of a Japanese company
for consideration exceeding ¥100 million to a non-resident of Japan, the resident of Japan that transfers the shares is required
to report the transfer to the Minister of Finance of Japan within 20 days from the date of the transfer, unless the transfer is
made through a bank, securities company or financial futures trader licensed under Japanese law.
If a Foreign Investor acquires our shares and, together with parties
who have a special relationship with that foreign investor, holds 10% or more of our issued shares as a result of such acquisition,
the Foreign Investor must, with certain limited exceptions, file a report of such acquisition with the Minister of Finance and
any other competent Minister within 15 days from and including the date of such acquisition. In certain limited circumstances,
however, a prior notification of such acquisition must be filed with the Minister of Finance and any other competent Minister,
who may modify or prohibit the proposed acquisition.
E.
Taxation
Japanese Taxation
The following is a discussion summarizing material Japanese tax
consequences to an owner of shares or ADSs who is a non-resident of Japan or a non-Japanese corporation without a permanent establishment
in Japan to which the relevant income is attributable. The statements regarding Japanese tax laws set forth below are based on
the laws in force and as interpreted by the Japanese taxation authorities as at the date hereof. These statements are subject to
changes in the applicable Japanese laws or double taxation conventions occurring after that date. This summary is not exhaustive
of all possible tax considerations which may apply to a particular investor. Potential investors should consult their own tax advisors
as to:
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the overall tax consequences of the acquisition, ownership and disposition of shares or ADSs, including specifically the tax
consequences under Japanese law,
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the laws of the jurisdiction of which they are resident, and
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any tax treaty between Japan and their country of residence.
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Generally, a non-resident
individual
of Japan or a non-Japanese corporation as a holder of shares or ADSs is subject to Japanese withholding tax on dividends paid
by IIJ. In the absence of any applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax,
the rate of Japanese withholding tax applicable to dividends paid by IIJ to non-resident individual of Japan or a
non-Japanese corporation is 20% (on or before December 31, 2037, the rate of Japanese withholding tax will be increased to
20.42% including the Special Reconstruction Income Tax, which is described below). With respect to dividends paid on listed
shares issued by Japanese Corporation (such as our shares) to a non-resident individual of Japan or a non-Japanese
corporation, the aforementioned 20% withholding tax rate is reduced to 15% for dividends to be due and payable thereafter (on
or before December 31, 2037, the rate of Japanese withholding tax will be increased to 15.315% including the Special
Reconstruction Income Tax). This tax reduction is not available for a non-resident individual who holds 3% of the
issued shares of a Japanese corporation. For the purpose of this paragraph, the Special Reconstruction Income Tax is a
special surtax at the rate of 2.1% imposed on individuals and corporations (whether residents or non-residents of Japan, or
Japanese corporations or non-Japanese corporations) until December 31, 2037 for reconstruction funding after the Great East
Japan Earthquake. This special surtax is applicable to various income taxes including withholding tax on dividends and the
amount of such special surtax is calculated by multiplying the amount of the original income tax by the surtax rate of 2.1%.
In consequence, the amount of the aggregate withholding tax on dividends will be the original amount of such withholding tax
plus the original amount multiplied by the surtax rate (i.e. 102.1% of the original amount). Japan has income tax treaties
whereby the above-mentioned withholding tax rate is reduced, generally to 15% for portfolio investors with, among other
countries, Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, New Zealand, Norway, Singapore and Spain
while the income tax treaties with Australia, France, Hong Kong, The Netherlands, Portugal, Saudi Arabia, Switzerland, the
U.K. and the United States generally reduce the withholding tax rate to 10% for portfolio investors. In addition, under the
income tax treaty between the United States and Japan, dividends paid to pension fund of qualified United States residents
eligible to enjoy treaty benefits are exempt from Japanese income taxation by way of withholding or otherwise unless such
dividends are derived from the carrying on of a business, directly or indirectly, by such pension funds. Under the income tax
treaty between Japan and the U.K., similar treatment will be applied to dividends. Under Japanese tax law, any
reduced maximum rate applicable under a tax treaty shall be available when such maximum rate is below the rate otherwise
applicable under the Japanese tax law referred to in the preceding paragraph with respect to the dividends to be paid by IIJ
on the shares.
Non-resident holders who are entitled to a reduced rate of Japanese
withholding tax on payments of dividends on the shares by IIJ are required to submit an Application Form for Income Tax Convention
regarding Relief from Japanese Income Tax and Special Reconstruction Income Tax on Dividends in advance through IIJ to the relevant
tax authority before the payment of dividends. A standing proxy for non-resident holders may provide such application service.
With respect to ADSs, the reduced rate is applicable if The Bank of New York Mellon, as depositary, or its agent submits in duplicate
two Application Forms for Income Tax Convention (one is FORM 4 subtitled “Extension of Time for Withholding of Japanese Income
Tax and Special Reconstruction Income Tax on Dividends with respect to Foreign Depositary Receipt” to the payer of dividends,
who has to file the original with the district director of tax office for the place where the payer resides, by the day before
the payment of dividends and the other is FORM 5 subtitled “Relief from Japanese Income Tax and Special Reconstruction Income
Tax on Dividends with respect to Foreign Depositary Receipt” to the district director of tax office through the payer of
Dividends in eight months from the day following the base date of payment of dividends for application purposes for which FORM
4 has been submitted). To claim the reduced rate, a non-resident holder of ADSs will be required to file proof of taxpayer status,
residence and beneficial ownership, as applicable, and to provide other information or documents as may be required by the depositary.
Non-resident holders of shares or ADSs who do not submit an application in advance will generally be entitled to claim a refund
from the relevant Japanese tax authority of withholding taxes withheld in excess of the rate of an applicable tax treaty.
Gains derived from the sale of the shares or ADSs outside Japan,
or from the sales of shares within Japan by a non-resident holder, generally are not subject to Japanese income or corporation
taxes provided that such gains are from portfolio investments where the shareholding ratio is within certain prescribed levels.
Japanese inheritance and gift taxes at progressive rates may be
payable by an individual who has acquired share of ADSs as a legatee, heir or done, even if the individual is not a Japanese resident.
United States Taxation
The following discusses United States federal income tax consequences
of the ownership of shares or ADSs. It only applies to U.S. holders of shares or ADSs, as defined below, who hold their shares
or ADSs as capital assets for tax purposes. It does not address special classes of holders, some of whom may be subject to other
rules including:
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life insurance companies,
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traders in securities that elect to use a mark-to-market method of accounting for securities holdings,
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investors liable for alternative minimum tax,
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investors that actually or constructively own 10% or more of the voting stock of IIJ,
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investors that hold shares or ADSs as part of a straddle or a hedging or conversion transaction,
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a person that purchases or sells shares or ADSs as part of a wash sale for tax purposes, or
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investors whose functional currency is not the U.S. dollar.
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This discussion is based on the tax laws of the United States,
including the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations and administrative
and judicial interpretations, as currently in effect, as well as on the Convention Between the United States of America and Japan
(the “Treaty”). These laws are subject to change, possibly on a retroactive basis. In addition, this discussion is
based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement relating
to the ADRs and any related agreement will be performed in accordance with its terms.
If a partnership holds the shares or ADSs, the United States federal
income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership.
A partner in a partnership holding the shares or ADSs should consult its tax advisor with regard to the United States federal income
tax treatment of an investment in the shares or ADSs.
For purposes of this discussion, a “U.S. holder” is
a beneficial owner of shares or ADSs that is:
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a citizen or resident of the United States,
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a domestic corporation,
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an estate whose income is subject to United States federal income tax regardless of its source, or
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a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United
States persons are authorized to control all substantial decisions of the trust.
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This discussion addresses only United States federal income taxation.
You should consult your own tax advisor regarding the United States federal, state and local and other tax consequences of owning
and disposing of shares and ADSs in your particular circumstances.
In general, and taking into account the earlier assumptions, for
United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares represented
by those ADRs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to United States federal income
tax.
The discussion under the headings “Taxation of Dividends”
and “Taxation of Capital Gains” assumes that we will not be treated as a Passive Foreign Investment Company (“PFIC”) for
U.S. federal income tax purposes. For a discussion of the rules that apply if we are treated as a PFIC, see the discussion under
the heading “PFIC Rules” below.
Taxation of Dividends
Under the United States federal income tax laws, if you are a U.S.
holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United
States federal income tax purposes) is subject to United States federal income taxation. If you are a noncorporate U.S. holder,
dividends that constitute qualified dividend income will be taxable to you at preferential rates applicable to long-term capital
gains provided that you hold the shares or ADSs for more than 60 days during the 121-day period beginning 60 days before
the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the shares or ADSs generally
will be qualified dividend income.
You must include any Japanese tax withheld from the dividend payment
in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you, in the case of shares,
or the depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for
the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United
States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the
U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S. dollar rate on the date the dividend
distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally,
any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment
in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible
for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources
within the United States for foreign tax credit limitation purposes.
Distributions in excess of current and accumulated earnings and
profits, as determined for United States federal income tax purposes, will be treated as a return of capital to the extent of your
basis in the shares or ADSs and thereafter as capital gain. However, we do not expect to calculate earnings and profits in accordance
with United States federal income tax principles. Accordingly, you should expect to generally treat distributions we make as dividends.
Subject to certain limitations, the Japanese tax withheld in accordance
with the Treaty and paid over to Japan will be creditable or deductible against your United States federal income tax liability.
Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the preferential
tax rate. To the extent a refund of the tax withheld is available to you under Japanese law or under the Treaty, the amount of
tax withheld that is refundable will not be eligible for credit against your United States federal income tax liability.
For foreign tax credit purposes, dividends will generally constitute
income from sources outside the United States. Dividends will, depending on your circumstances, be either “passive”
or “general” income for purposes of computing the foreign tax credit allowable to you.
Taxation of Capital Gains
If you sell or otherwise dispose of your shares or ADSs, you will
recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value
of the amount that you realize and your tax basis, determined in U.S. dollars, in your shares or ADSs. Capital gain of a noncorporate
U.S. holder is generally taxed at preferential rates where the holder has a holding period greater than one year. Additionally,
gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
PFIC Rules
We do not believe that we will be treated as a PFIC for United
States federal income tax purposes for our most recent taxable year. However, this conclusion is a factual determination made annually
and thus may be subject to change.
In general, we will be a PFIC with respect to you if for any of
our taxable years in which you held our ADSs or shares:
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at least 75% of our gross income for the taxable year is passive income, or
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at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce
or are held for the production of passive income.
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Passive income generally includes dividends, interest, royalties,
rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets
that produce passive income. If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign
corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation,
and as receiving directly its proportionate share of the other corporation’s income.
If we are treated as a PFIC and you did not make a mark-to-market
election, as described below, you will be subject to special rules with respect to:
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any gain you realize on the sale or other disposition of your shares or ADSs, and
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any “excess distribution” that we make to you (generally, any distributions to you during a single taxable year
that are greater than 125% of the average annual distributions received by you in respect of the shares or ADSs during the three
preceding taxable years or, if shorter, your holding period for the shares or ADSs).
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Under these rules:
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the gain or excess distribution will be allocated ratably over your holding period for the shares or ADSs,
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the amount allocated to the taxable year in which you realized the gain or excess distribution or to prior years before the
first year in which we were a PFIC with respect to you will be taxed as ordinary income,
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the amount allocated to each other prior year, with certain exceptions, will be taxed at the highest tax rate in effect for
that year, and
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the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each
such year.
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Special rules apply for calculating the amount of the foreign tax
credit with respect to excess distributions by a PFIC.
If your shares or ADSs are treated as marketable stock of a PFIC,
you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead,
in general, you will include as ordinary income each year the excess, if any, of the fair market value of your shares or ADSs at
the end of the taxable year over your adjusted basis in your shares or ADSs. These amounts of ordinary income will not be eligible
for the favorable tax rates applicable to qualified dividend income or long-term capital gains. You will also be allowed to take
an ordinary loss in respect of the excess, if any, of the adjusted basis of your shares or ADSs over their fair market value at
the end of the taxable year or over their final sale or disposition prices, but only to the extent of the net amount of previously
included income as a result of the mark-to-market election. Your basis in the shares or ADSs will be adjusted to reflect any such
income or loss amounts.
Your shares or ADSs will be treated as stock in a PFIC if we were
a PFIC at any time during your holding period in your shares or ADSs, even if we are not currently a PFIC. For purposes of this
rule, if you make a mark-to-market election with respect to your shares or ADSs, you will be treated as having a new holding period
in your shares or ADSs beginning on the first day of the first taxable year beginning after the last taxable year for which the
mark-to-market election applies.
In addition, notwithstanding any election you make with regard
to the shares or ADSs, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC
(or treated as a PFIC with respect to you) either in the taxable year of the distribution or the preceding taxable year. Dividends
that you receive that do not constitute qualified dividend income are not eligible for taxation at the preferential rates applicable
to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated
earnings and profits (as determined for United States federal income tax purposes) in your gross income, and it will be subject
to tax at rates applicable to ordinary income.
If you own shares or ADSs during any year that we are a PFIC with
respect to you, you may be required to file Internal Revenue Service Form 8621. You should consult your tax advisor regarding
the PFIC rules and potential filing and other requirements.
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F.
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Dividends and Paying Agents
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Not required.
Not applicable.
We file periodic reports and other information with the SEC. The
SEC maintains a web site at www.sec.gov that contains reports and other information regarding us and other registrants that file
electronically with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at
100 F Street, NE, Washington, D.C. 20549. Please call SEC at 1-800-SEC-0330 for further information on the operation of its public
reference room. In addition, you may also inspect reports filed with the SEC and other information at our Tokyo headquarters, located
at Iidabashi Grand Bloom, 2-10-2 Fujimi, Chiyoda-ku, Tokyo 102-0071, Japan.
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I.
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Subsidiary Information
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Not applicable.
Item 11. Quantitative and Qualitative Disclosures
about Market Risk
We are exposed to market risks from changes in interest rates,
equity prices and foreign currency exchange rates.
Interest Rate Risk
As of March 31, 2016, our interest rate risk on short-term borrowings
and capital lease obligations were not material since the weighted average interest rate as of March 31, 2016 is reasonably low
and we do not expect interest rates to rise sharply in the near future.
Equity Price Risk
The fair value of our investments, primarily in marketable securities,
exposes us to equity price risks. In general, we have invested in highly liquid and low-risk instruments, which are not held for
trading purposes. We are exposed to changes in the market prices of the securities. As of March 31, 2015 and 2016, the fair
value of such investments was ¥4,314 million and ¥3,944 million, respectively. The potential loss in fair value resulting
from a 10% adverse change in equity prices would be approximately ¥431 million and ¥394 million as of March 31, 2015
and 2016, respectively. See Note 4 “Other Investments” to our consolidated financial statements, included in this annual
report on Form 20-F.
Foreign Currency Exchange Rate
Risk
The assets held by us which are exposed to foreign currency exchange
risk are mainly U.S. dollar denominated bank deposits. The carrying value, which also represents fair value, amounted to $9,582
thousand (¥1,155 million) and $15,880 thousand (¥1,915 million) as of March 31, 2015 and 2016, respectively. The potential
loss in fair value for such financial instruments from a 10% adverse change in quoted foreign currency exchange rates would have
been approximately ¥116 million and ¥192 million as of March 31, 2015 and 2016, respectively.
Item 12. Description of Securities Other than Equity
Securities
Not applicable.
Not applicable.
Not applicable.
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D.
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American Depositary Shares
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Fees and charges payable by ADR Holders
The following table shows the fees and charges that a holder of
our ADR may have to pay to The Bank of New York Mellon, as Depositary, either directly or indirectly:
Services
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Fees (USD)
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Taxes and other governmental charges
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As applicable
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Such registration fees as may from time to time be in effect for the registration of transfers of Shares generally on the Shareholders’ register of the Issuer or Foreign Registrar and applicable to transfers of Shares to the name of the Depositary or its nominee or the Custodian or its nominee on the making of deposits or withdrawals hereunder
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As applicable
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Such cable, telex and facsimile transmission expenses as are expressly provided in this Deposit Agreement
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As applicable
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Such expenses as are incurred by the Depositary in the conversion of Foreign Currency
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As applicable
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The execution and delivery of Receipts and the surrender of Receipts
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$5.00 or less per 100 ADR
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Any cash distribution made pursuant to the Deposit Agreement
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$0.02 or less per ADR
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Receipt or Receipts for transfers made
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$1.50 or less per certificate
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The distribution of securities, such fee being in an amount equal to the fee for the execution and delivery of American Depositary Shares referred to above which would have been charged as a results of the deposit of such securities, but which securities are instead distributed by the Depositary to Owners
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As applicable
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Fees and other payments made by the Depositary to the Issuer
For the fiscal year beginning April 1, 2015 and ended March 31,
2016, The Bank of New York Mellon, as Depositary, reimbursed IIJ for the NASDAQ Stock Market listing fees of $40,000. The Bank
of New York Mellon, as Depositary has also agreed to reimburse IIJ for its annual stock exchange (NASDAQ Stock Market) listing
fees for future years. Furthermore, from April 1, 2015 to March 31, 2016, the Bank of New York Mellon has waived a total of $56,230.94
in fees associated with the administration of the ADR program, investor relations expenses and administrative fees for routine
corporate actions in addition to their standard fees for providing investor relations information services.