QAs from earnings release meetings and others

November 6, 2023:2Q23 Financial Results Briefing (Online)

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

Question: What are the reasons that the revenue recognition of the overseas data center (DC) project (the overseas DC project) whose revenue is approximately JPY3.0 billion was postponed to the second half of this fiscal year (2H23) from the first half (1H23), which was the initial plan? Also, could you be more specific to when in 2H23 you expect to recognize the revenue?

Answer: As disclosed in our presentation material, the overseas DC project is about exporting constructed equipment such as servers which are to be used in a container type DC for a public sector client in Asia. The purchase agreement had already been concluded, and the construction of equipment for shipment and the pre-export inspection had been completed. However, the revenue recognition has been postponed due to prolonged procedures before the export as the project is large and highly complicated, which has involved various parties such as a domestic comprehensive export-related company, an overseas client and its government-related organization, their agents, and domestic and overseas financial institutions. We would like to refrain from making a specific comment on the timing as the export procedure is led by parties other than IIJ.

Question: Please comment on the profit of the overseas DC project.

Answer:While we cannot mention an individual project's profit, as disclosed in our presentation material, the overseas DC project has its reasonable profit. Please note that the scale of revenue and profit remain unchanged even after the revenue recognition is postponed to 2H23.

Question: Are there any concerns that in systems integration (SI) business, as we saw in 1H23, we might see other postponements of revenue recognition to the next fiscal year again in 2H23?

Answer:Generally speaking, due to the characteristics of SI construction whose revenue is recognized at the timing of acceptance of a project, we cannot guarantee that no project will be postponed to the next fiscal year as we occasionally see projects being postponed. The past fiscal years' annual SI construction revenue had been affected by project postponements to a certain degree. If a large scale project is postponed, financial results could be impacted in this fiscal year, yet we assume that the overseas DC project is to be recognized in 2H23 and we shall certainly make efforts not to have any more of postponed project.

Question: You mentioned that lead-time for SI projects is becoming longer. Could you tell me the standard time frame from order received to revenue recognition for small-to-mid size projects and large scale projects?

Answer:Generally speaking, for small-to-mid size projects such as server construction, it takes about one to six months from order received to revenue recognition. As for large scale projects, due to its complexity and a large number of locations, etc., it takes over a year from proposal to order received and from order received to revenue recognition, respectively. The majority of IIJ's SI projects have been small-to-mid size projects such as server construction related projects. However, as enterprises' internal network (NW) is migrating to more open type NW by incorporating Internet technology from closed type NW, we are seeing a significant increase in proposal opportunities for such large scale comprehensive NW projects. As each enterprise's internal NW needs to be renewed after a certain period of time, we recognize that the number of projects requiring longer lead-time is to increase under such a circumstance.

Question: What is the revenue breakdown of the project for Chiba city educational NW renewal whose total order received is approximately JPY12.3 billion (5 years in total) ?

Answer: As disclosed in our presentation material, the revenue breakdown are approximately JPY5.0 billion in SI construction, approximately JPY2.0 billion (for several years in total) in SI operation and maintenance, and the rest (for several years in total) in NW services. This project's order received for SI construction and SI operation and maintenance is included in each of its 2Q23-end order backlog. Generally speaking, large scale projects such as NW renewal are offered through "Service Integration" model in which our NW services are integrated as part of SI. For such comprehensive projects, we only recognize SI portion as SI order received out of the entire project's order received.

Question: Regarding 2Q23-end SI construction order backlog, when we exclude approximately JPY11.0 billion, which is expected to be recognized as revenue next fiscal year, the remaining approximately JPY15.3 billion, which is the expected revenue recognition for this fiscal year, is slightly larger than that of 2Q22-end. Please comment on full-year outlook for SI revenue.

Answer:In 1H23, SI fell short of our initial expectation mainly due to the postponement of the overseas DC project and longer lead-time for large-scale projects. As a usual trend, almost all of 2Q-end order backlog of SI construction usually are recognized as revenue in 3Q. 2H revenue depends on how much order we can accumulate in 3Q and 4Q. Therefore, as for 2H23, we shall accumulate not only large scale projects which tend to have longer lead-time, but also small-to-mid size projects to cover the weaker than expected 1H23 SI results.

Question: I heard that IIJ had applied for "Government Cloud" promoted by the Digital Agency. Could you comment on the outlook for financial impact as well as its related investment?

Answer:We would like to refrain from making any comment regarding "Government Cloud" as the results of the application has not been published as of now, November 6, and also our financial performance depends on its penetration. As for the related investment, we plan to meet the requirement as part of our continuous enhancement of our own cloud service "IIJ GIO." Therefore, it is difficult to just pin-point the "Government Cloud" specific investment.

Question: IIJ's equity method applicable company DeCurret DCP Inc. (DeCurret) announced that the first in Japan digital currency "DCJPY" is to be issued in July 2024. Could you tell us when they plan to become profitable?

Answer:In the "Digital Currency Forum," over a hundred members such as enterprises, local governments, and other organizations have executed various proof of concepts using digital currency, and DeCurret, a secretariat for the "Digital Currency Forum," is going to provide their digital currency platform service for environmental value transaction. While we are quite excited and expect great opportunity in the mid-to-long term by introducing new infrastructure to society, we would like to refrain from making any specific comment on when they become profitable as it depends on digital currency's penetration in Japan.