QAs from earnings release meetings and others

August 8, 2018: 1Q FY2018 Results Briefing

(*) This is a summary of questions and answers took place at the Briefing.

Question: How was 1Q18 financial results compared to IIJ's internal plan?

Answer: Although we were slightly worried mainly because full-MVNO related fixed type cost was to increase from 1Q18, the results exceeded our internal plan. While 1Q18 systems construction revenue was relatively weak as it reflected small volume of 4Q17-end order-backlog, enterprise services such as security-related services which revenue grew by 16% from 1Q17 contributed to overall revenue accumulation.

Question: Any plan for upward revision on financial targets?

Answer: We just finished 1Q which revenue and profit volume is small; therefore, we do not have any thought or plan of that sort at this moment.

Question: 1Q18 operating income results is weaker than Bloomberg Consensus. (*1)

Answer: There are only 3 analysts to make up the quarterly Bloomberg Consensus. Our 2Q financial results are generally larger than 1Q and our disclosed target for operating income for the first half FY2018 is JPY2.5 billion. Therefore, Bloomberg Consensus of over JPY1.3 billion for operating income seemed off to us.

Question: 1Q18 net addition of consumer mobile subscription of 31,000 was stronger than that of 4Q17 of 18,000. What kind of promotion did you run?

Answer: As examples of our promotion, we made initial registration cost to be free and co-worked with sales partners and MVNE (*2) clients on headsets-bundled offerings.

Question: How do you compete with Rakuten Mobile who runs so much promotion?

Answer: We shall continue to exercise our basic strategy for mobile which is to maintain reliable connectivity and leverage various sales channel. According to the Ministry of Internal Affairs and Communication ("MIC")(*3), SIM card contracts as of March-end 2018 was 11.3 billion and our market share was 14.6%. By adding our MVNE subscription, we believe our market share should be around 21-22%, which could be thought as top share.

Question: Any new prospects for MVNE clients?

Answer: We continue to receive requests to become our MVNE clients. We shall expect our MVNE clients to increase along with these sales transactions.

Question: Please tell us how you compete against mobile carriers in IoT field. Softbank Corp. invested in Handy Japan recently.

Answer: There are a number of players interested in IoT field – of course including mobile carriers. Handy Japan is our client. We differentiate by leveraging our cloud, system integration, security and other network elements to offer comprehensive solution for IoT projects: that is our basic strategy.

Question: Full-MVNO related revenue seemed to accumulate accordingly with plan. Will full-MVNO start to make profit contribution from FY2019?

Answer: Costs to directly make up full-MVNO related fixed type cost are network remodeling fees paid to NTT Docomo and depreciation costs for HSS/HLR systems built by ourselves. We also have variable-type costs such as fees to issue SIMs. Gathering enterprise traffic through full-MVNO should lead to better utilization of mobile network and we expect that should contribute to mobile profit as a whole.

Question: Please tell us about the situation surrounding mobile infrastructure expansion.

Answer: We have been continuously expanding mobile infrastructure (a few times a month) by monitoring subscription accumulation and traffic patterns. This spring, our infrastructure was quite crowded and we wanted to improve connectivity. That is why we implemented additional expansion.

Question: Please give us your comment on the MIC and the Japan Fair Trade Commission efforts to change restrictive 4 years smartphones contracts.

Answer: We would like fair competition and as for that we believe their action is positive.

Question: How are profitability of the large-scale SI projects you received in 1Q18?

Answer: We make sure projects have desirable profitability when we receive orders.

Question: Please tell us about GDPR-related business

Answer: Demands for GDPR-related consultation is strong and the related projects lead us to offer our services such as cloud. We expect the situation continues to be favorable as there is similar movement in the State of California, following EU.

Question: Please elaborate on "JOCDN handling increasing traffic"(*4)?

Answer: JOCDN currently offers CDN services to 15 clients(*5) including Japanese broadcasting companies and Internet contents holders. There is quite visible traffic increase for TV programs Internet platform which allows users to watch TV contents already broadcasted. Due to JOCDN, we expect FY2018 revenue from Internet connectivity service for enterprise should increase by a several hundreds of millions Japanese yen.

Question: Any change in DeCurret's(*6) service launch schedule?

Answer: No, DeCurret is working as planned.

• (*1)Consensus means average of sell-side analysts' financial estimates.
• (*2)Abbreviation of Mobile Virtual Network Enabler. MVNE provides business and service infrastructure to MVNOs.
• (*3)Details of MIC's report which is available in Japanese can be found here
• (*4)IIJ's equity method investee (IIJ ownership 20%) which was established by 15 Japanese broadcasting companies to provide reliable and high performance CDN services.
• (*5)Please refer to page 2 of FY2017 presentation material
• (*6)IIJ's equity method investee (IIJ ownership 35%) which was established by 18 Japanese prominent companies including mega banks to provide cryptocurrency exchange and settlement business. Their plan is to launch cryptocurrency exchange services in FY2018 and settlement services in FY2019 as announced in the press release titled "IIJ Engages in Financial Services Business for Cryptocurrency Exchange and Settlement"