QAs from earnings release meetings and others

February 7, 2019: 3Q FY2018 Results Briefing

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

Question: Operating income is strongly growing. What is driving the growth?

Answer: An expansion of total gross margin, which was made by recurring revenue’s strong growth and systems integration’s gross margin ratio improvement, absorbed the cost increase. Also, we continue to make improvements and we think there is effective collaboration between service development and order accumulation.

Question: Please explain why you kept FY2018 financial targets for operating income remain unchanged when nine months results exceeded your initial plan. Going forward, how is operating income going to improve?

Answer: It’s mainly because there is an uncertainty about how much NTT Docomo’s interconnectivity charge, which is revised annually and usually fixed at the end of March, for our MVNO network decrease from last year. As we continue to engage in service developments, we may see amount of business investment and cost to increase from time to time. Yet, we strive to increase operating income in the middle to long term along with strong revenue accumulation, supported by such competitive service developments.

Question: Please give us your comment on network services gross margin ratio and its outlook.

Answer: Network services gross margin ratio should continue to improve along with enterprise recurring revenue accumulation. As for 3Q18, because we implemented stronger than usual mobile infrastructure enhancement this summer in order to improve connectivity quality, network services gross margin ratio slightly decreased from 2Q18. While it is difficult to seek for network services gross margin ratio improvement this fiscal year as our fixed type cost is increasing along with the launch of full-MVNO services, we expect it to improve by accumulating full-MVNO revenues and others from next fiscal year on.

Question: Some have announced to lower their consumer mobile pricing. How will such impact IIJ’s consumer mobile services, IIJmio?

Answer: According to a report by the Ministry of Internal Affairs and Communications, IIJmio’s market share was about 14%, which is without MVNE subscription, but if you add our MVNE subscription, we believe we are top share player in inexpensive consumer mobile market. While competition continues, we strive to execute our strategy to seek for better mobile infrastructure utilization by leveraging MVNE business to accumulate consumer subscription, acquire enterprise traffic such as IoT to which we can exercise our competitiveness. If NTT Docomo decreases pricing for consumer, their pricing for MVNOs such us should also decrease. We hope to see fair competitive environment.

Question: 3Q18 (three months) SI gross margin strongly improved by 59.4% from 2Q18. What is driving?

Answer: This fiscal year SI gross margin ratio is stronger than last fiscal year as 2Q-3Q17 SI profitability was low mainly due to overall situation of projects . Also, we are seeing improved engineer utilization rate as we reorganized systems engineers and further strengthened resource management. Moreover, we believe that our efforts to integrate network services and SI have been making contribution to income growth.

Question: 3Q18 equipment sales grew by 48.9% from 2Q18. What was the cause?

Answer: Equipment sales mainly include smartphone and router. These days, demand for smart phones is continuously increasing. As for 3Q18, we recognized revenue of IoT-related devise for a particular project.

Question: Regarding unrealized loss on holding marketable equities, will we see something similar in 4Q again? How about next fiscal year?

Answer: 1Q-3Q18 unrealized loss on holding marketable equity, JPY2.95 billion, is due to a matter of accounting following the revision of U.S. GAAP. As of December 31, 2018, we have unrealized gain of JPY4.6 billion on those equity, which name and number of holding shares are disclosed, and there is no actual loss. As for 4Q, we expect to see unrealized gain compared to 3Q as current stock prices are higher than December-end. As for the full fiscal year, we expect to see loss as 3Q loss volume was quite large. As for next fiscal year, we plan to adopt IFRS under which, unrealized gain/loss and gain/loss from sale will not recognized in profit and loss statement. (It will be recognized as fluctuation of other comprehensive income on balance sheet.)

Question: Equity loss related to DeCurret Inc. was originally planned to be around JPY0.6 billion, what is current situation?

Answer: DeCurret completed systems developments and business operation preparation needed to launch cryptocurrency exchange services and is going through process to become a registered cryptocurrency exchange service vender. Depending on the timing of registration, equity loss may not be as large as initially expected as we will start to recognize cost such as marketing cost along with service launch.

Question: Will NHK, Japan's national public broadcasting organization, become a shareholder of JOCDN Inc. Please give us your comment on JOCDN's business outlook.

Answer: In NHK budget plan, there is JPY100 million of investment. We are in no position to make any comment. As penetration of 4K and 8K contents become more common, it is expected that demand and data volume handled by CDN to continuously expand. JOCDN which is our joint company with Japanese broadcasting companies, is very well positioned to capture such demand/trend.

Question: Chairman Suzuki, please share your thoughts on delisting from NASDAQ market.

Answer: As we’ve been listed on NASDAQ for about 20 years, I’d say it is sad, to be honest. NASDAQ IPO had definitely helped us collaborating with U.S. companies on technology issues when Internet had just started. We decided to be delisted mainly by considering the U.S. GAAP issue and our ADR trading volume.

Question: Do you expect any significant impact from consumption tax increase?

Answer: No. We do not expect any significant impact on our business as most of our business transaction are for enterprises.

November 6, 2018: 2Q FY2018 Results Briefing

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

Question: How is Network Services' gross margin going to expand?

Answer: 2Q18 Network Services’ gross margin ratio was 16.2%（1Q18 16.8％, 2Q17 17.4％）mainly due to an increase in fixed type Network cost along with the launch of Full-MVNO services. (*1) The Full-MVNO revenue has been accumulating accordingly with our plan. We expect Network Services’ gross margin to expand as our mobile network utilization rate improves in the middle-to-long term along with an increase in enterprise mobile traffic due to expansion of IoT usages.

Question: Please explain how Systems Integration's gross margin for 2Q improved to 13.0% compared to 1Q18 10.5％ and 2Q17 10.0％. Can the similar results be expected for the latter half of this fiscal year?

Answer: Systems engineers' productivity improved as we restructured our systems engineers' division at the beginning of this fiscal year from vertical, divide per customer industry, to horizontal, able to access any industry, so that we can utilize system engineers’ resources more effectively. The absence of noticeably unprofitable project has also contributed to Systems Integration gross margin ratio improvement.(*2) As for the latter half of this fiscal year, it’s difficult to make a comment as not all projects are visible at this point, we plan to maintain system engineers utilization and operate so that unprofitable projects are not made.

Question: 2Q18 IP Services revenue increased strongly by 6.2% year over year. Did JOCDN Inc. make any contribution? How are they doing?

Answer: JOCDN has been proving CDN services to 15 clients (*3) including a large contents holder and handling growing volume of traffic. JOCDN has been making business developments almost as planned; we expected a few hundred millions Japanese yen of revenue from JOCDN most of which is to be recognized in IIJ’s Internet connectivity services for enterprise.

Question: What is the breakdown of operating income?

Answer: As our business model is to provide Network Services and Systems Integration together to meet clients' need, we do not divide Sales and General Administrative expensive, meaning there is no operating income for each. Improvement of Systems Integration gross margin as well as expansion of total gross margin contributed to the operating income growth.

Question: Going forward, how is each revenue going to accumulate for the next fiscal year?

Answer: We haven't started to make budget plan for the next fiscal year. Generally speaking, as over 80% of our consolidated revenue is made up by monthly recurring revenue, we assume the first half results shall lead to the latter half and the next fiscal year.

Question: Compared to the subscription growth of consumer mobile（IIJmio）, its revenue seems to be growing stronger. How is so?

Answer: We offer SIM and headsets bundled services and we have a wide range of headsets. We continuously expand our headsets line-up (recently we offered OPPO and Essential Phone) and such offerings are attracting orders.

Question: How will NTT Docomo's significant price down impact consumer mobile market and IIJ' MVNO business?

Answer: Although it’s difficult to make comment when their service offers’ details are not disclose, we can say that we always pay close attention to mobile carriers, other MVNO players and market trend, not only to this particular event. We shall continue to operate our MVNO business. Also, we think it is natural to imagine that mobile interconnectivity charge for MVNOs(*4) should also decrease. As for the government, their strategy to expand MVNO market share by changing regulations remain the same.

Question: How will NTT Docomo's plan to split communication service charges and headsets impact consumer mobile market and IIJ' MVNO business?

Answer: While it's difficult to make comment when their service offers' details are not disclose, our line-ups of headsets is considered one of the best among MVNOs and our SIM-headsets bundled offerings are accumulating orders. As long there is a fair competition, we think it's a good thing.

Question: What kind of strategy will IIJ take if mobile interconnectivity charge for MVNOs decrease?

Answer: We shall make decisions most appropriate to situations. We think maintaining good service quality is important.

Question: How is mobile business doing compared to the middle-term plan?(*5)

Answer: For our middle term plan, we based that the net addition of subscription for M2M(*6)/IoT transactions are to be larger than consumer mobile. Along with the launch of Full-MVNO services we're seeing M2M/IoT related subscription accumulating.

Question: iPhone and its comparability with eSIM

Answer: Towards the service launch of our official eSIM platform services next spring, (*7) we're working on verification on many products not only iPhone and seeing favorable verification test results. As we're deciding on the details of services, we are not yet able to explain them.

Question: Outlook for Market and IT investment

Answer: While it's difficult to foresee macroeconomics, we expect favorable IT market as demands for IoT are quite inevitable. By leveraging our comprehensive services line-ups such as Full-MVNO, Cloud, SI, and Security as our competitive advantage, we aim to expand our business.

Question: Status on human resources

Answer: Although turnover at IIJ is quite low among IT sector (half of sector-average), we recognize human resources situation is tough and implementing counter-measures.

• (*1)Full-MVNO related fixed type cost is approximately JPY0.3 billion per quarter and has started from March 2018, the service launch.
• (*2)Please also take a look at page 2, 5, and 9[714KB] of our presentation material for 2Q18 announced in November 6, 2018.
• (*3)Please also take a look at page 20 of our presentation material for 4Q17 announced in May 15, 2018 [907KB].
• (*4)IIJ provides MVNO services through MVNO scheme by purchasing mobile infrastructure from NTT Docomo. The connection charge, a flat-rate per Mbps is calculated every year based on NTT Docomo's actual costs in a previous year along with the "Telecommunications Business Law" and the "Guidelines related to Operation of the Institution of Category II Designated Telecommunications Facilities."
• (*5)We disclosed our middle term plan in our FY2015 earnings. For details please see here.
• (*6)Abbreviation for Machine to Machine. It enables devices connected to network to exchange information automatically and perform designed actions.
• (*7)As written in our press release published in July 12, 2018 "IIJ to Begin Verification of eSIM Devices and Full MVNO Services," we are planning to launch commercialized eSIM platform services in spring 2019.