QAs from earnings release meetings and others

May 10, 2024:4Q23 Financial Results Briefing (Online)

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

Question:Under the Mid-to-long Term Vision, you will aim for operating margin (consolidated basis) of 12% to 15%. Please comment on how you expect the operating margin to improve in the mid-to-long term.

Answer:As for Network (NW) Service, we expect it to continuously serve as a growth driver for profit margin by improving gross margin through economies of scale along with an increase in Service Integration projects. As for Systems Integration (SI), we expect it to serve as a growth driver for revenue. Also, along with the accumulation of SI operation and maintenance, we anticipate the gross margin will gradually improve. Lastly, as the revenues of SI and NW services increase, the ratio of selling, general, and administrative expenses to revenue should slightly decrease, contributing to an improvement of operating margin.

(*)Service Integration: Provide in-house developed NW Services with SI, Greater opportunities for proposal and such areas along with internal large-scale NW renewals, etc.

Question:Due to the impact of price increase in VMware products, your financial targets for the fiscal year ending March 31, 2025 (FY24) are disclosed in ranges. Please provide more details.

Answer:IIJ Group uses a lot of virtualization software of VMware products and there was the revision of their pricing structure and license program in Apr. 2024. Under the revision, generally individual products are no longer sold separately, but rather are bundled together, which would result in a significant increase in license fees from Apr. 2024. Although we are taking actions including the price revision of our services, it is difficult to assume the extent of passing cost rises onto revenues through the price revision due to the short notice of new VMware products' pricing structure and applicable terms and condition to users. Therefore, we set the financial targets for FY24 in ranges. The upper limit of the range represents the case that the progress in our actions such as the price revision could absorb the impact of increasing costs. The lower limit of the range represents the case that it takes longer time to apply the price revision, which could not fully absorb the impact of increasing costs except to the extent that can be assumed.

(*)VMware Inc. is the U.S. IT company that provides cloud computing and virtualization.

(*)VMware products are cloud computing and virtualization software which were provided by VMware Inc.

Question:Due to the impact of price increase in VMware products, you expect your first half (1H24) revenue and profit to decrease year over year (YoY). Please explain in details.

Answer:As mentioned above, we are taking actions including price revision of our services as we are faced with an increase in cost for VMware products from the beginning of FY24. Despite such efforts, even at the upper limit of our 1H24 targets, we would be unable to fully absorb the impact of cost increase. Therefore, we expect our 1H24 targets for revenue and profit to decrease YoY. As for the latter half of FY24, we expect profits to increase, even at the lower limit of the range as the progress of our revised prices would be made more.

Question:Construction of Shiroi Data Center's third site is included in the new Mid Term Plan. Please explain in details.

Answer:As Shiroi Data Center's second site, which started its operation in July 2023, is to reach its full capacity around FY26, we have initiated discussions regarding the construction of the third site. Given the facts that there are many ongoing large-scale construction projects nationwide, resulting in rising construction costs, we will carefully consider the appropriate timing and scales of the construction.