QAs from earnings release meetings and others

August 8, 2023：1Q23 Financial Results Briefing (Online)

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

Question: Please explain why 1Q23 operating profit was the same level as 1Q22.

Answer: Our 1Q revenues are the lowest throughout the year, while some of our costs such as personnel-related costsand expenses increase from the beginning of a fiscal year. In 1Q23, personnel-related costs and expenses increased by 14.4% year over year (YoY) mainly due to the hiring of new graduates which was approximately 1.4 times that of the previous year and the modification of salary table. While 1Q23 network（NW）service revenues and gross profit both continued to increase by 9.4% and 16.1% YoY, respectively, systems integration (SI) revenues only grew by 0.3% YoY and gross profit decreased by 9.8% YoY which was mainly due to the postpone of revenue recognition of systems construction projects. As the result, 1Q23 operating profit was the same level as 1Q22. We plan to recognize the revenue of the overseas datacenter construction project of approximately JPY3 billion, which was delayed, in 2Q23. (page of 9) Because projects are becoming larger and more complex which is making lead time to recognize revenue longer, we could expect the latter half of FY23 to have the greater portion of revenue. Yet, the favorable demand situation is continuing and we are handling a number of potential projects (page 19).

Question: Do you think the current trend of projects becoming larger and more complex is to continue going forward? Please also comment on the potential financial impact by an increase of this kind of project.

Answer: We think so. In the recent years, mainly due to the penetration of cloud, remote work and zero trust concept, both private and public sector clients are shifting from closed intranet systems to more open and comprehensive systems by incorporating Internet, cloud, security and others into internal network. Under this favorable demand situation, we believe our competitive advantage and role of being able to offer NW services and SI together should continue to be appreciated more and more. Although it is taking longer to recognize SI revenues due to an increase in these kinds of large and complex systems, we consider this to be a transitional situation due to structural business change. As for FY23, we could expect the latter half of FY23 to have the greater portion of revenue.

Question: 1Q23-end order backlog largely increased by 32.5% and JPY5.07 billion YoY to JPY20.6 billion from 1Q22-end. Please comment on the revenue recognition timing of these order backlog.

Answer: Among the JPY20.6 billion, we expect approximately JPY4 billion is to be recognized as revenue in the next fiscal year ending March 31, 2025. The remaining order backlog is expected to be recognized as revenue this fiscal year, some of which are to be recognized in the latter half of this fiscal year.

(*)Many potential projects underway (page 19)

Question: Please explain why 1Q23 systems operation and maintenance order received decreased YoY.

Answer: Generally speaking, it is a common practice in Japan to have 1 year contract of operation and maintenance which automatically renews for the average life cycle of a system, 4 to 5 years. As for large projects, we sometimes have 4 to 5 years contracts of operation and maintenance all at once. As 1Q22 order received included approximately JPY3 billion of large projects with fixed multi-year contracts, if excluding such impact, 1Q22 order received was approximately JPY20 billion which is almost the same level as JPY19.7 billion of 1Q23 order received. We think that strong order situation is continuing.

Question: Please comment on the status of cloud service revenue.

Answer: 1Q23 cloud service revenues decreased YoY mainly due to a decrease in the usage by a certain gaming client who use our multi-cloud service and tend to optimize its systems, while we continue to accumulate cloud service revenues from general enterprises. Because multi-cloud service related costs is mainly license purchasing from third party cloud service vendors such as Amazon Web Service, which fluctuates depending on demand, the impact of a decrease in multi-cloud service revenue on profit is limited.

Question: Please explain why 1Q23-end consumer mobile IIJmio’s subscription slightly decreased from 4Q22-end.

Answer: We think it was mainly because consumer mobile service providers such as carriers and MVNOs had refrained from promotion activities, which led to the decreased overall demand to switch plans.

Question: 1Q23 Selling, General, and Administrative Expenses (SG&A) increased by 14.6% YoY. What is your expectation for 2Q23?

Answer: We expect 2Q23 SG&A to be smaller than 1Q23 because 1Q SG&A tend to increase largely quarter over quarter and YoY due to seasonal factors such as personnel-related costs of new graduates including engineers whose personnel cost is to be recognized as costs of revenues upon the assignment to engineering departments from 2Q, human resource training expenses, and advertisements.