QAs from earnings release meetings and others

August 7, 2024：1Q24 Financial Results Briefing (Online)

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

Question:You mentioned that 1Q24 operating profit level was slightly stronger than expected. Could you please explain the factors behind that?

Answer:In addition to managing the VMware-related issues (*) as expected, 1Q24 systems construction revenue, which is one-time revenue, strongly grew by 74.1% year-over-year (YoY), mainly driven by the high order backlog of construction at the end of the previous fiscal year, which was approximately JPY10 billion higher than the same point in time last year. Additionally, the steady accumulation of Network (NW) service revenues, which are recurring revenues, increased by 7.4% YoY. We think that these are the major factors.

(*) For details, please refer here.

Question:You have acquired several large-scale projects in 1Q24 as well. Could you please comment on the mid- to long-term outlook?

Answer:As recent news reports have indicated, deficiencies in NW and system operations can lead to large-scale disruption on a global scale. With various systems being constructed on NW, even minor operational mistakes can lead to critical troubles. Therefore, the larger the project, the more our stable operational capabilities are highly valued. We anticipate that this will enable us to continue acquiring large-scale projects in the mid-to long-term.

Question:With the advancement of NW society, the stable operation of NWs and systems is becoming increasingly important. Please comment on how IIJ develops engineers with strong operational capabilities.

Answer:The foundation of our technology, Internet, is built on a detailed accumulation of technical knowledge. We believe it is important for engineers to comprehensively and gradually master these technologies over time. Central to this belief is the importance of each engineer's sense of responsibility and pride in their work. Therefore, it is crucial to carefully evaluate each individual, fostering their growth by encouraging them to take on challenges and gain diverse experiences. Since our founding, we have valued this approach and have continually accumulated expertise based on these principles.

Question:Regarding the impact of VMware, could you please explain the quarterly and full-year impacts in more detail?

Answer:Regarding the VMware impact on SI (Cloud), the cost increase in 1Q24 was approximately JPY1.2 billion. Of this, approximately JPY0.7 billion was one-time cost due to provisions, leaving approximately JPY0.5 billion as the quarterly cost increase, which will continue from 2Q24 as well. The negative impact on SI profits in 1Q24 was approximately JPY0.9 billion. We expect this negative impact to be offset in the second half of this fiscal year through additional revenue from the progress of price pass-through. Regarding the impact on NW services, the cost increase in 1Q24 was approximately JPY0.3 billion, and this level of increase is expected to continue from 2Q24 onwards. We plan to sequentially implement price revisions for some NW services starting at the beginning of 3Q24. Due to these factors, we have estimated that the negative profit impact relating to the VMware impact for FY24 is about JPY1.1 billion.

Question:During your Mid-term Plan period (FY24-FY26), you are planning to construct the third site of your own data center, Shiroi Data Center Campus (Shirai DC). Could you please provide details about the future plans?

Answer:As disclosed in our Mid-term Plan which was announced in May 2024, the Shiroi DC second site, which started operations in July 2023, is expected to reach full capacity around the fiscal year ending March 2027. Therefore, we are considering the construction of third site. While being mindful of external factors such as the rising construction costs, we will carefully consider the appropriate timing and scale for the construction.

Question:The yen is appreciating. What could be the impact on your financial results?

Answer:Many of NW equipment, servers, and software we procure are made overseas, so generally, a stronger yen is our preference. The impact of exchange rates on short-term performance is limited, as it is often related to the scale of capex and others. In non-operating profit and loss, exchange rate gains(losses), as well as valuation gains(losses) on USD-denominated funds, can be directly affected by USD/JPY exchange rate fluctuations. In 1Q24, we recorded a foreign exchange gain of JPY196 million and valuation gain on funds, etc. of JPY585 million.

Question:Please comment on the current status and development of generative AI applications and services.

Answer:We are utilizing AI in some internal operations, and we are advancing a company-wide project to use generative AI in software development and business processing. For our customers, through SI, we provide AI functionality implementations as solutions, and we are also considering service development.