QAs from earnings release meetings and others

November 8, 2024：2Q24 Financial Results Briefing (Online)

(*)This is a summary of questions and answers took place at the Briefing.
FY24 stands for a fiscal year ending March 31, 2025, 1H24 stands for the first half of FY24, 2H24 stands for the latter half of FY24.

Question:The acquisition of large-scale projects has become a new norm, and their revenue contribution has gradually started. Could you please comment on the profitability and risks associated with these projects?

Answer:In recent large-scale projects, there are cases where we strategically set the gross margin for systems integration (SI) construction lower. However, many of these projects include higher margin of Systems Operation and Maintenance (SI O/M) contracts, which we expect to improve the overall gross margin as they transition into the operational phase. Additionally, our approach primarily involves Service Integration(*), and we assess the profitability of the entire project, including higher margin network (NW) services. Since many large-scale projects are multi-year contracts, we anticipate additional project opportunities during their contract period. Regarding risks, securing talented engineers is an essential factor for future growth. We are progressing as planned with both new graduate and mid-career hires, while maintaining a low turnover rate. Therefore, we do not see any materialized risks related to talent acquisition at this point.

(*)As for the acquisition of large-scale projects, please refer to this document

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

Question:I understand that there is strong demand; however, 1H24 SI orders received was +1.2% year over year. Could you please explain the factors behind it?

Answer:We believe strong demand is continuing as 1H24 SI orders received was similar level to 1H23 which included a large-scale individual project worth approximately JPY7.0 billion for Chiba City (approximately JPY5.0 billion for construction and approximately JPY2.0 billion for SI O/M).

Question:Could you please explain the factors behind the relatively modest orders received for 2Q24 SI O/M compared to 2Q23?

Answer:For general projects, SI O/M contracts are automatically renewed on an annual basis, with one year's worth recorded as SI O/M orders received. However, for large-scale projects, some of them are contracted for 4-5 years, which can cause fluctuations in quarterly order volume. The timing of orders received for general projects also impacts these figures. Therefore, it may be appropriate to review trends on a semi-annual or annual basis.

Question:SI gross margin improved in 2Q24. Could you please provide comments on the 2H24 outlook?

Answer:This improvement is primarily due to the favorable progress of price pass-through for cloud services in 1H24. Additionally, 4Q typically sees higher revenue due to seasonal factors, so we anticipate the margin to improve through 2H24.

Question:You have been continuously acquiring large-scale projects such as network renewals, and the announcement in October 2024 of the new joint banking system platform for Japanese regional banks in partnership with IBM Japan seems to indicate that IIJ is entering a new stage. Do you expect such initiatives to increase going forward? Also, could you provide your comments on the anticipated contribution of this project to your business performance?

Answer:We recognize that the internal NWs and systems of companies and government agencies are undergoing a structural shift towards more complex systems that integrate internet-related technologies such as cloud, security, and remote access. In this environment, we believe that our advanced NW technology and operational capabilities will become even more important. Therefore, we expect similar initiatives to increase going forward. The first project, valued at approximately JPY6.0 billion with an 8-year contract, is scheduled to begin recognizing primarily NW services revenue starting in 3Q24. We anticipate that there will be opportunities to cross-sell additional services such as cloud and security services associated with this first project, and the second project, which is currently in progress, is expected to be of a similar scale.

(*)For details of the partnership, please refer to this press release.

Question:Could you please explain the impact on profits in 2H24 due to VMware's changes in the licensing structure?

Answer:In 1H24, the price pass-through for cloud services progressed largely, and from early October, we implemented price revisions for major NW services. As a result, we expect that the impact of VMware's licensing changes will largely be resolved in 2H24, leading to an improvement in the financial results.

(*)Please refer to the following documents for the impact by VMware's license pricing revision
･4Q23 presentation material, page 26
･1Q24 presentation material, page 17

Question:The overall satisfaction score for the FY24 employee survey is high at 3.9 out of 5. Could you please share your future goals related to this?

Answer:While we do not have a specific target, we have maintained an overall satisfaction score of 3.9 out of 5 for the past five years, and we aim to continue maintaining and improving this level moving forward.

(*)Please refer to page 11 of 2Q24 presentation material

Question:Is there a planned revision to the wage table?

Answer:There has been no revision to the wage table for FY24, but as disclosed, we are considering adjustments for FY25.

(*)Please refer to page 11 of 2Q24 presentation material