Risk Factors

Below are the main factors that could impact IIJ Group’s results of operations, financial condition, and cash flow as well as investors’ decision making. Unless otherwise stated, the forward-looking statements described below are based on our expectations, assumptions, estimates and projections as of June 28, 2024. As the statements include uncertainties, actual results may differ from those contained or suggested herein.

*The following information was quoted from our English translation of our annual report "Yuka-shoken-houkokusho" for the fiscal year ended March 31, 2024 which was disclosed on June 28, 2024.

1. Risks regarding IIJ Group Business Developments

（1）Risks regarding business developments

　 Our business is principally conducted in Japan and most of our revenues are from customers operating in Japan. For the fiscal year ended March 31, 2024, 87% of our total revenues were from customers operating in Japan. If the Japanese economy deteriorates, which results in lower levels of network and systems related investment and expenditures, customers may respond to such circumstance by prioritizing low prices over quality. We may experience severe price reduction pressure and/or cancellation of large accounts. Systems integration in particular tends to be very sensitive to the economic situation in Japan as well as demands for IT investments. If our results of operations and financial condition could be significantly impacted and we may not be able to maintain our current level of revenues and income and/or achieve our expected levels of revenues and income, because customers’ demand does not expand as expected due, for example, to the economic situation or decreases in investment appetite, or we fail to differentiate ourselves over service quality, or fail to keep up with rapidly changing market trends which could lead to price competition and cancellation of contracts, we may be unable to pay target dividends.
　 Our basic strategy is to provide reliable and value-added enterprise network services and systems integration together to mainly enterprises and central government agencies that use networks for their business by leveraging our Internet related technology and customer base. We may not be able to execute our business strategies according to plan if we fail to maintain our competitive technological advantage or develop and provide network services or systems integration that differentiates us from competitors.
　 Costs of enterprise network services mostly consist of circuit costs, depreciation costs, maintenance costs, personnel costs, outsourcing costs, and office rent costs, which are not directly linked to revenue fluctuations. These costs tend to increase gradually along with new service development, facility expansion, increase in number of employees, increase in compensation levels, or increase in price levels. We may not be able to cover the current network costs and/or an increase in such costs, which could result in profit decrease, if, for example, we experience cancellations (whole or partial) or severe pricing pressure for our enterprise network services as well as systems operation and maintenance, which are recurring services, by clients, especially large clients, or if revenue does not increase as planned or if revenue decreases.
　 Costs of cloud computing services, which is mainly recognized as systems operation and maintenance, are mostly consisted of depreciation costs, maintenance costs, license costs, personnel costs, outsourcing costs, and office rent costs. These upfront costs tend to increase due to expansions of service facilities, new service developments, increases in personnel, and increases in compensation as well as evaluation levels. We may not be able to cover the current cloud computing services’ costs and/or an increase in such costs, which could result in profit decrease, if we fail to accumulate cloud computing service revenues as planned, due, for example, to weak demand and/or slow migration to cloud, or if we experience cancellations (whole or partial) or severe pricing pressure.
　 As for consumer network services, compared to enterprise network services, its market trends rapidly change, and the volatility of revenue and income tends to be large. Due to our limited brand recognition among consumers, in addition to direct sales, we use indirect sales channels such as sales partners and MVNE through which we provide our services to other MVNOs to grow consumer mobile services. We may not be able to maintain or expand our revenue and operating profit according to plan if, for example, we fail to acquire customers according to our plan, if we are forced to lower our prices due to competition, if the unit price of interconnectivity charges and purchasing cost of voice communication from mobile carriers for our mobile infrastructure do not decrease as much as expected, which creates a gap between our estimates and the actual results, if the number of our sales partners and MVNE clients as well as their business transactions do not increase or rather decrease, if our creditability is damaged due to service problems, or if we are faced with greater than expected amount of communication service costs such as interconnectivity charges, data communication charges and depreciation costs in order to maintain service quality. As regards to our pricing for consumer mobile services, we began offering “GigaPlans” from April 2021 which is a lower-priced plan compared to the previous plan by comprehensively considering factors such as overall competitive landscape, interconnectivity charge and voice communication costs.
　 Regarding IIJ Group’s SG&A expenses, personnel-related expenses, office rent expenses, sales commission expenses, commission expenses, advertising expenses and others have been increasing every year along with business developments. These expenses could increase more than expected. Also, if gross profit of network services, systems integration, and ATM operation business do not increase or rather decrease, we may be faced with profit deterioration as increasing SG&A expenses cannot be absorbed.

（2）Risks regarding business investments

　 We have been aggressively investing in new businesses, services and solution developments to further grow our business over the medium to long term. Such investments include an increase in human resources, acquisition of network equipment and capital expenditures including software development and data center construction. As for the number of employees, we had 4,451 and 4,803 employees as of March 31, 2023 and 2024, respectively. The number of employees increased by 304 and 352 in the fiscal years ended March 31, 2023 and 2024 respectively. Capital expenditures, including assets acquired by finance leases, for the fiscal years ended March 31, 2023 and 2024 were JPY20.8 billion and JPY22.5 billion, respectively. Depreciation and amortization for property and equipment (capital expenditure related depreciation and amortization) for the fiscal years ended March 2023 and 2024 were JPY15.3 billion and JPY15.6 billion, respectively.
　 We started providing cloud services from December 2009 and have been continuously investing in data centers, servers, storage, network equipment, and software in order to meet customers’ demand, and continuously enhance service functions. Along with our investment, costs such as depreciation and amortization have been increasing. Revenues for our cloud computing services for the fiscal years ended March 31, 2023 and 2024 were JPY32.4 billion and JPY33.4 billion, respectively. Capital expenditures related to domestic cloud computing services were JPY2.0 billion and JPY1.5 billion for the fiscal years ended March 31, 2023 and 2024, respectively.
　 As for servers, storage devices, telecommunication equipment software and licenses, and their maintenance costs that IIJ Group acquires, many transactions are denominated in the U.S. dollars. Even if transactions in Japanese yen, their costs are related to the U.S. dollars. In the event that Japanese yen continues to be weak, our capital expenditures, depreciation costs and maintenance costs may increase beyond our expectation.
　 In order to meet housing needs, including cloud computing service facilities that are expected to grow along with business expansion, and to integrate service facilities currently spread out across eastern Japan, we constructed our own system module type data center in Shiroi City, Chiba Prefecture and started operating its first site data center facility from May 2019, and its second site data center facility from July 2023. Capital expenditures related to this data center facilities were JPY5.4 billion and JPY5.5 billion for the fiscal years ended March 31, 2023 and 2024, respectively. As for the fiscal year ending March 31, 2025, we plan to make a capital expenditure of approximately JPY23 billion which includes construction of additional system modules for Matsue data center which is operated in Matsue City, Shimane Prefecture and facility expansion for Shiroi data center’s second site. Capital expenditures are expected to be incurred along with the expansion of data center facilities including the construction of Shiroi data center’s third site which is in our future plan. In recent years, materials and personnel costs related to construction have been increasing, and there has been a shortage of labor. Due, for example, to these, capital expenditures related to data center could increase or we may not be able to construct accordingly to schedule.
　 We have been providing mobile services to both enterprises and consumers from January 2008 by purchasing mobile network infrastructure mainly from NTT Docomo, as an MVNO. The total (sum of enterprise and consumer) mobile services revenues for the fiscal years ended March 31, 2023 and 2024 were JPY42.3 billion and JPY46.1 billion respectively. The total number of mobile service subscriptions were approximately 4.14 million and 4.81 million as of March 31, 2023 and 2024, respectively. Along with growth of mobile services revenue and subscription, we need to increase the contracted mobile bandwidth we purchase from NTT Docomo and KDDI.
　 We have been enhancing our overseas business developments such as network services including cloud services and systems integration to meet mainly network and systems demands of Japanese companies heading overseas to seek business opportunities. As of the filing date of this document, we have twelve overseas consolidated subsidiaries and two overseas equity method investees. In addition to the existing subsidiaries in Singapore, Thailand, China, Hong Kong, Indonesia, Vietnam and Malaysia, we may obtain more subsidiaries by establishing new companies and/or by co-working with local companies to seek greater business opportunities, as the need for IT is stronger in these regions compared to the United States and Europe. Overseas business revenues for the fiscal years ended March 31, 2023 and 2024 were JPY25.6 billion and JPY35.3 billion, respectively. As for oversea business profit, operating profit, which is based on managial accounting, was JPY2.0 billion and JPY2.7 billion for the fiscal years ended March 31, 2023 and 2024, respectively. IIJ and IIJ-Global together had injected the capital of JPY4.6 billion into our overseas consolidated subsidiaries and equity method investees by the fiscal year ended March 31, 2024. Also, as of March 31, 2024, IIJ and IIJ-Global together had lent a total of JPY0.2 billion to five of our overseas consolidated subsidiaries. We may establish overseas subsidiaries in other regions and add overseas offices by working together with local companies. In April 2021, in order to strengthen our Singaporean business which is a core of the ASEAN business, we purchased a Singaporean system integrator PTC for 44 million Singaporean Dollar, equivalent to JPY3,632 million, and in December 2023 we purchased a Malaysian system integrator PTC SYSTEMS SDN. BHD. Both of them are our consolidated subsidiaries. The overseas business, compared to the domestic business, is exposed to various uncertainties including regulatory, economic, religious, cultural, geopolitical, and diplomatic risks. Although we strive to comply with the necessary regulations, failure to comply with foreign regulations such as the U.S. Foreign Corrupt Practices Act (“FCPA”) or failure to appropriately comply with local regulations due to inadequate internal control could impose a negative impact on our business.
　 Our consolidated subsidiary Trust Networks is in charge of ATM operation business, which operates bank ATMs and the related network systems and receives a commission for each bank withdrawal transaction. Along with ATM placement, we continuously purchase ATMs as written in “PART 1. Information on the Company, Item 2. Business Overview, 3. Risk Factors, 1. IIJ Group Business Developments (6) Risks regarding group management.”

（3）Risks regarding dependency on third-party vendors for telecommunications, network equipment and service facilities

　 In order to provide reliable network services such as IP services, we rely on telecommunications carriers to procure mid-to-long distance communication lines that are required for our network backbone, local access lines and WAN services’ lines. We procure backbone lines and WAN services’ lines mainly from NTT Communications and KDDI, local access lines mainly from NIPPON TELEGRAPH AND TELEPHONE EAST CORPORATION (“NTT East”), NIPPON TELEGRAPH AND TELEPHONE WEST CORPORATION (“NTT West”), and regional power electricity telecommunications carriers. We use mobile infrastructure of NTT Docomo and KDDI by paying mobile interconnectivity charge to provide mobile related services as an MVNO.
　 We depend on third-party suppliers for some of our purchase for our equipment, such as routers to be used for our network, and software to be used for service offering and business operation, mainly from certain U.S. companies. While we do not currently have any significant concerns over the equipment, software and others we procure from third-party suppliers, if there arise any concerns such as security-related issues which make us difficult to use them, we may need to procure alternatives. With respect to equipment and software procured from third-party suppliers, rising prices, exchange rate fluctuation, and other factors may cause procurement prices to increase, and we may not be able to coordinate with suppliers or be unable to pass on the costs to our customers, or there may be delays, or the supply of equipment and software may become unstable or insufficient, resulting in additional costs for the procurement of equipment and software.
　 We lease most of our service facilities, such as data centers and office facilities, from third-party suppliers. If the costs of electricity suddenly increase, mainly due, for example, to supply constraints on energy resources, we may be unable or delay to renegotiate price increases with data center owners, or we may fail to pass such price increases on to our customers. If the supply of electricity becomes unstable or inadequate due to the same factors, we may be forced to pay additional costs to procure electricity.
　 Although no such incident has occurred, if third-party suppliers of telecommunication lines, equipment, software and service facilities, which we depend on, are faced with supply difficulties or fail to deliver within an appropriate period of time due to factors including the shortage in supply of semiconductor, we may experience service interruptions for long hours, or we may not be able to provide services. In such cases, our results of operations and financial condition could be adversely impacted.

（4）Risks regarding service reliability

1）Risks regarding maintaining service quality and execution of appropriate operation

　 In order to maintain and improve the quality of our service offerings, we may need to increase investment in servers, network equipment, and software, or increase leasing volume of data communications, as well as infrastructure, beyond our expectations. Although we believe we have been appropriately managing our service facilities, if we fail to appropriately manage our service facilities, leading to deterioration of service quality, or fail to differentiate our services from competitors, or if we need to make greater facility investment than expected or if we invest excessively, our results of operations and our financial condition may be significantly and adversely impacted.

2）Risks regarding service interruption

　 Interruptions, errors, or delays with respect to our backbone network or service facilitates may be caused by natural factors such as fires and earthquakes, power shortages, power losses or interruptions, errors or delays with carriers’ service facilities, or terrorism, which are beyond our control. Although we implement necessary measures to avoid serious security incidents, we may be prevented from providing our services due to cyber-attacks, computer viruses, human error, or unintentional or intentional interruption by Internet users. Although no such incident has occurred and our backbone and service facilities are designed with fault tolerance, if we damage our creditability or business opportunities due to failure to continuously provide services, our results of operations or financial condition may be significantly and adversely impacted.

3）Risks regarding management of confidential customer information

　 We store and manage confidential information related to mobile services and trade secrets obtained from customers in Japan and abroad. We pay attention to protecting the confidentiality of such information and take measures to ensure the security of our network, in accordance with the guidelines regulated by the Ministry of Internal Affairs and Communications (“MIC”) as well as the Ministry of Economy, Trade, and Industry. If unauthorized access, human operation error, leakage, loss, alteration, or unauthorized utilization of customer information take place and then if we fail to appropriately respond to such issues which would lead to a deterioration in our creditability or compensation for damages, our results of operations and financial condition could be adversely impacted. Foreign countries have been enhancing their regulations regarding data protection of personal information including the General Data Protection Regulation (“GDPR”) in the European Union. Regarding GDPR, our consolidated subsidiary, IIJ Europe Limited, submitted its Binding Corporate Rules, internal rules defining the global policy regarding personal data protection within the IIJ Group, to the office of the UK’s Information Commissioner and was approved. Although no such incidents has occurred, if we fail to comply with these foreign countries’ regulations unintentionally and are required to pay a penalty, then this could ultimately result in an adverse effect on our business, financial condition and results of operations.

（5）Risks regarding acquiring human resources

　 The expertise of IIJ’s and each group company’s management is very important in executing business. Also, reliable service offering depends on the continuous contributions of our engineers and other staff. The number of employees and personnel-related cost and expenses have been increasing along with our business expansion. We need to procure the adequate number of engineering, sales, and business planning and administrative personnel at the appropriate timing. In addition, in line with the current economic environment, wage levels need to be revised upward in an appropriate and timely manner. If we fail to acquire or retain the members of management or staff needed for business, or if we fail to appropriately control personnel-related expenses due, for example, to greater than necessary recruitment, or personnel-related expenses increase more than expected due to the labor market climate, as well as regulation changes, our results of operations and financial condition may be adversely impacted.

（6）Risks regarding group management

　 We aim to create group synergy by bringing consolidated subsidiaries as well as equity method investees closer. In order to create close business relationships, our group directors and employees take concurrent positions as group company directors, and we also send employees to our group companies. As of this document’s filing date, we have seventeen consolidated subsidiaries and six equity method investees. Profit and loss of each consolidated subsidiary’s financial results are consolidated into our group consolidated financial statements, and each equity method investee’s financial results are recorded as share of profit (loss) of investments accounted for using the equity method. Due to each company’s business situation, the investment value of subsidiaries and equity method investees held by us can fluctuate. If profit and loss of our subsidiaries and equity method investees is unfavorable, or volume of loss is significant, our results of operations and financial condition may be adversely impacted.
　IIJ’s substantial investment in Crosswave, IIJ’s former equity method investee, became worthless due to Crosswave’s commencement of corporate reorganization proceedings in August 2003. As a result of this, we recorded losses on, equity in net loss of Crosswave, investment, restraint deposit and loan, of JPY12,667 million and JPY1,720 million for the fiscal years ended March 31, 2003 and 2004, respectively.
　 We bought IIJ-Global, which mainly provides WAN services, from AT&T Japan LLC for JPY9,170 million and made it our consolidated subsidiary in September 2010. For the fiscal years ended March 31, 2023 and 2024, IIJ-Global had JPY28.9 billion and JPY31.1 billion in revenues, respectively, and JPY1.9 billion and JPY1.3 billion in operating profit, respectively. Total balance of goodwill and intangible assets as of March 31, 2024 related to IIJ-Global was JPY2.5 billion. If IIJ-Global fails to accumulate expected future revenue and profit and is concluded to be lacking in value compared to its goodwill and intangible assets, we may incur an impairment loss on such assets.
　 Trust Networks, our consolidated subsidiary established in July 2007, operates bank ATMs and related network systems, and receives a commission for each bank withdrawal transaction. As of the filing date of this document, we have invested a total of JPY2.6 billion (IIJ ownership: 79.5%). ATM operation business segment revenue was JPY2.8 billion and JPY2.9 billion, and its operating profit was JPY0.9 billion and JPY1.0 billion for the fiscal years ended Mach 31, 2023 and 2024 respectively. Business operation might be difficult for Trust Network if the number of ATMs or users decreases, if the number of ATM transactions decreases, mainly due, for example, to a decrease in user appetite and store closure, or if it fails to maintain favorable relationships with related parties.
　 In December 2016, we established JOCDN Inc. as a joint venture, which provides CDN　services. Japan Broadcasting Corporation (NHK) and WOWOW Inc. became JOCDN’s shareholders through the third-party allotment in the fiscal year ended March 31, 2020. As of this document’s filing date, we have invested a total of JPY0.1 billion (IIJ ownership: 16.8%).
　 In January 2018, we established DeCurret Inc. to provide digital currency exchange and settlement services as a joint venture. DeCurret Inc. that had been providing crypto asset trading services since April 2019, but divested its crypto asset business in February 2022, in order for DeCurret Holdings, Inc., currently our equity method investee, and DeCurret DCP Inc., its subsidiary to focus on digital currency business. We have invested a total of JPY7.1 billion (IIJ ownership: 38.2%) on its business and accumulated loss of equity method as of March 31, 2024 was JPY5.9 billion. In March 2023, IIJ purchased unsecured straight bond of JPY2.0 billion with maturity of ten years issued by DeCurret DCP Inc. DeCurret Holdings, Inc. is still in a start-up phase and if its business does not expand as planned, it may cause the damage of its enterprise value, the record of greater-than-expected equity method investment loss by IIJ, the need of additional capital injection and others. In such a case, IIJ Group’s results of operation and financial condition may be adversely impacted.
　 In April 2021, we acquired PTC, a Singaporean system integrator, at the cost of 44 million Singaporean Dollar, equivalent to JPY3,632 million, and made it our wholly owned subsidiary to strengthen our Singapore business as the core of ASEAN business. For the fiscal years ended March 31, 2024, PTC had JPY12.8 billion in revenues and JPY0.3 billion in operating profit. Total balance of goodwill and intangible assets related to PTC as of March 31, 2024 was JPY4.4 billion. If PTC fails to accumulate revenues or profits as planed and it is concluded that its value is not worth related goodwill and intangible assets, we may incur an impairment loss on such assets.
　 In order to continuously maintain or enhance group synergy, we may increase our ownership of group companies, provide financial support, give guarantees, or reorganize group structure. We may seek to establish new group companies or execute capital participation to launch new businesses. We may seek out capital transactions, including M&As, in order to expand our scale of business, customer base, and service line-ups. We may need to engage in capital funding or issue ordinary shares to execute capital strategies. Also if IIJ Group’s business operation is constrained due to certain regulations particular to the subsidiaries and/or affiliated companies, IIJ group’s results of operation and financial condition may be adversely impacted.
　 As for equity method investees over which we do not have total control, if their business strategies becomes different from ours and our consolidated subsidiaries, our business interests may differ from them and their shareholders other than us. Thus, we may not be able to pursue group synergy.

（7）Risks regarding technological innovations

　 The telecommunications market, including Internet, is characterized by rapidly changing technology, industry standards, customer needs, and competitive landscape regarding the frequent introduction of new products and new services. Under such conditions, our existing services may become less competitive. Although we focus on technology research and development to keep a competitive technological advantage, if we fail to obtain access to new or important technologies or to develop and introduce new services and enhancements that are compatible with changing industry technologies, standards, and customer requirements, or if more time and expenses are needed for research and development activities, our financial condition and results of operations could be significantly and adversely impacted.

2. Risks regarding market condition

（1）Risks regarding price competitions

　 Pricing competition for network services and systems integration are severe. Thus, competitors enhance service development and marketing. If price competition becomes more extreme, revenue for network services and systems integration may not increase according to plan, our profitability could deteriorate, or we may incur large costs or expenses. Such a probability is always present, our results of operations and financial condition could be adversely impacted.

（2）Risks regarding network-related costs, etc.

　 Network-related costs mostly consist of fixed type costs, such as circuit-related costs of backbone, network equipment-related costs, network operation costs for network operation centers, and personnel-related costs to conduct network operation. Volatility of these costs may impact our financial situation and results of operations adversely. If we experience rapid expansion of Internet traffic, if circuit-related costs increase due to an increase in unit price for backbone network, if we are required to procure a greater than expected volume of network capacity, if we fail to procure the necessary network capacity, or if we contract more network capacity than we actually require to service our customers, our financials and results of operations may be adversely impacted. Because we pay for part of our international circuit and network equipment in foreign currency and some purchase costs we pay in Japanese yen are charged based on the amount in foreign currency, there is a possibility that procurement costs shall increase due to exchange rate fluctuations.
　 In order to provide mobile data communication services, we lease mobile infrastructure from mobile carriers of NTT Docomo and KDDI. We pay them for interconnectivity fees as wholesale telecommunication service charges, which are calculated by multiplying the mobile unit charge per bandwidth in accordance with the “Telecommunications Business Law” and the “Interconnection Rules for Category II Designated Telecommunications Facilities,” which are administrated by the MIC, by our leasing mobile bandwidth. The mobile unit charge of data communication service cost has been decreasing based on the three-year forecast provided annually by mobile carriers as the future cost method. For our usage during the fiscal year ended March 31, 2024, we recognized the cost based on the predicted mobile unit charge presented by mobile carriers which was calculated based on the future cost method and we plan to recognize difference between the predicated and fixed unit charge, which is scheduled to be fixed and announced around December 2024. Regarding our usage during the fiscal year March 31, 2023, the cost impact of the difference between the unit charge presented as the March 31, 2023 and the finalized unit charge disclosed in December 2023 was immaterial. How much we pay to mobile carriers is to increase along with increases in subscriptions and mobile traffic. Our results of operations could be impacted if the mobile unit charge of data communication service cost or purchase cost of voice communication service increases or does not decrease as much as expected or if we are required to lease greater than expected mobile bandwidth.

（3）Risks regarding outsourcing resources

　 We use outsourced personnel. If the rate of outsourced personnel increases due to labor shortage, if we fail to appropriately manage outsourcing resources, if we fail to accumulate adequate revenue volumes to meet outsourcing costs, or if we fail to procure the necessary volume of outsourcing resources, our financial situation and results of operations may be adversely impacted.

（4）Risks regarding competition

　 The major competitors of our network services are major telecommunications carriers such as NTT Communications, KDDI Corporation and their affiliates. The major competitors of our systems integration business are system integrators such as NEC Corporation, Fujitsu Limited, NTT Data Corporation and their affiliates. Our competitors have advantages over us, including, but not limited to, substantially greater financial resources, larger pools of technology human resources, higher brand recognition, and larger customer bases. Our competitors may be better able to sustain downward pricing pressure, provide services that IIJ does not offer, and pursue competitive M&A transactions. The sales strategy and pricing strategy of our competitors may impact the market our group belongs to, and if we fail to effectively differentiate ourselves from competitors and fail to execute our business strategy as planned, our financial results and financial condition may be adversely impacted.
　 The major competitors of our cloud computing services are the companies listed above as well as global players such as Amazon Web Services, Inc. and MICROSOFT CORPORATION. These competitors may put additional business resources into cloud services and outsourcing related businesses. If we fail to successfully differentiate our services and solutions from those of our competitors, we may not be able to achieve expected future revenue and income, or we may not recoup our investment in cloud computing services, which may adversely affect our financial condition and results of operations.
　 The major competitors of our mobile services including MVNE and the consumer mobile business, are mobile carriers such as NTT Docomo, KDDI, Softbank Corp., their affiliates as well as MVNOs. Many of these competitors have higher brand recognition among consumers and greater financial resources, which enables them to implement more extensive and well-developed marketing and low-price strategies. Going forward, competition, including new competitors entering the market and pressure to lower pricing, may become tougher. Under such circumstances, a failure to differentiate our services from those of competitors could impact our results of operations and our financial condition adversely.

（5）Risks regarding climate change

　 Following the Paris Agreement which entered into force in 2016, initiatives to reduce greenhouse gas emissions have been accelerating globally. We recognize the importance of taking initiatives to respond to climate change related risks and taking steps to transit to low carbon society. Risks regarding climate change include the possibility of physical damage mainly caused by an increase in natural disaster and extreme weather and the possibility of changes of politics, regulations, economy, market and lifestyle as we move toward low carbon society. For example, there are risks of damage to business facilities due to natural disasters, or difficulties in procuring business facilities and services due to supply chain disruption, risks of increases in electricity costs or inability to procure electricity, including emission credits and renewable energy, for servers and other network equipment, data centers, and offices, which shall increase along with our business expansion, and a reputational risk if we fail to adequately take measures to realize decarbonization. If we fail to appropriately respond to such risks, our results of operations and our financial condition could be adversely impacted.

（6）Risks regarding force majeure

　 Force majeure such as natural disaster, blackout, terrorism, armed action, regional conflict and pandemic infectious diseases may make it difficult for us to provide services reliably, may require us to recognize cost and/or investment more than expected, and may make it difficult to execute group strategy as planned. In such a case, our results of operation and financial condition could be significantly and adversely impacted.

3. Risks regarding results of operations

（1）Volatility of operating results

　 Volume and timing of revenue and operating profit recognition depend on the economic situation in Japan; Japanese companies’ appetite for IT; the revenue accumulation status of network services revenue, which is recurring revenue; the number of systems integration projects and their profitability; the profitability of cloud computing services and mobile services; overseas business developments; trends in the network-related costs for network services; differences between the actual and estimated decrease rate in regard to unit price for mobile interconnectivity charges; trends in depreciation and amortization and maintenance costs; trends in personnel cost and expense; trends in license costs; existence and/or volume of impairment on tangible assets, goodwill, and intangible assets; fluctuations in foreign currency exchange rates; and an impact from capital transactions including M&As. Volume and timing of profit before tax and recognition of profit attributable to owners of the parent are related to the volume of finance income and finance costs, fluctuations in share of profit (loss) of investment accounted for using the equity method related to equity method investees, recognition of income tax expense including tax effect, and profit (loss) attributable to non-controlling interests, in addition to fluctuations in operating profit. Therefore, our annual, semi-annual, and quarterly financial results may not work as guidelines for future earnings outlook.
　 Our financial results may differ from disclosed financial targets not only due to risk factors but also other factors. In fact, we timely revised and announced our disclosed financial targets for the fiscal years ended March 31, 2014, 2015, 2017, 2020, 2021 and 2022. Increases in investments and costs for development of new services and businesses could impose volatility on results of operations as the corresponding revenue volume and timing are difficult to predict and likely to change.

（2）Systems integration

　 Revenue for systems integration is comprised of one-time revenue for systems construction, which includes equipment sales, and recurring revenue for systems operation and maintenance. Generally speaking, transactions regarding systems integration and equipment sales are concentrated at the end of March, which is a fiscal year-end month for many Japanese companies. Fluctuations in our quarterly revenue and profit heavily relate to systems integration, and the volume of revenue and profit tend to be the largest in the fourth quarter. Our results of operations, financial condition, and fluctuations of these may be impacted by our ability and the timing when we recognize revenue and profit of systems integration, especially for the revenue recognition timing and profitability of large systems integration projects.
　 While we can expect to continuously record recurring revenue for systems operation and maintenance, revenue and profitability of systems integration could fluctuate due, for example, to the number of new construction projects, as well as the revision of terms and conditions of systems operation and maintenance contracts. The hardware portion of systems construction revenue may be replaced with cloud computing service revenue if there is an increase in migration to cloud computing service-based systems from on-premise systems, which could cause our revenue volume to fluctuate. In recent years, we have been seeing projects becoming larger and more complex. Large-scale systems construction projects, in particular, tend to take longer time to complete them and recognize revenues. Such projects need more personnel, with more precise project management. Also, large-scale systems construction projects tend to have lower profitability as competitive pricing is required to receive orders. Projects could become unprofitable if we fail to appropriately execute project management due, for example, to system problems, changes in system requirements, or unexpected workforce deployment. We use a large number of engineers both inhouse and outsourced personnel for systems integration. Personnel cost and its rates are increasing. If we fail to manage human resources, or if we fail to recognize adequate revenue to cover personnel costs, we may fail to failure to achieve appropriate profit levels and/or projects could become unprofitable. In these cases our results of operations and financial condition could be adversely affected. If we fail to appropriately procure engineers or personnel, including outsourced resources for software development, which are needed to complete systems integration projects, the revenue recognition timing may be delayed or orders may be cancelled. Also, if we fail to appropriately manage clients’ data, we may face lawsuits.

（3）Recognition of impairment loss on tangible assets, goodwill, and intangible assets

　 We own network equipment, severs, construction, such as data centers, and assets such as software related to business mainly for network services and systems integration as well as back office systems and office facilities. We conduct impairment testing on these tangible and intangible assets if significant changes in business circumstances. These may lead the record of impairment losses.
　 We may record intangible assets such as goodwill and assets related to customer relationships on our consolidated balance sheets through capital transactions such as M&As. As of March 31, 2024, the total balance of goodwill on our consolidated balance sheets was JPY10.3 billion. Of these, major balances by cash generating units used for impairment assessment were JPY5.8 billion for cash generating unit of network services and SI mainly in Japan, and JPY4.2 billion for cash generating unit of PTC, one of our overseas subsidiary. As of March 31, 2024, the intangible assets related to customer relationships that are subject to amortization was JPY1.1 billion. Of these, intangible assets in relation to IIJ Technology Inc., a former subsidiary of IIJ which was merged in April 2010, and IIJ-Global were JPY0.4 billion and JPY0.3 billion, respectively. Although we have never recorded impairment loss on goodwill and customer relationships, if significant changes in business circumstances indicate that they may be impaired, we may conduct impairment testing and record loss as a result.

（4）M&As (Mergers and Acquisitions)

　 We may execute M&As because we recognize that it is important for us to have more resources such as but not limited to, human resources, customers, application layer technology, and overseas business foundations, as well as to create synergistic effects to increase the scale of our business through M&As. The mergers and acquisitions transactions may not always be on good terms and conditions, bear the results we expect, or have synergistic effects, although no such incident has occurred. We acquired PTC, a Singaporean system integrator in April 2021, a Malaysian system integrator, PTC SYSTEMS SDN. BHD. in December 2023 and made both of them our wholly-owned subsidiaries to strengthen Singapore operations to become the core of business in the ASEAN region.

（5）Fluctuations of value on holding investment securities

　 We invest in non-affiliated companies in order to further enhance our business relationships and in funds which invest mainly in unlisted stocks. The breakdown of our investment securities held recorded on our consolidated balance sheets as Investment securities (Equity) as of March 31, 2024 was JPY14.6 billion. As for breakdown of Other Investments, JPY7.6 billion of investments in funds, and JPY2.0 billion of unsecured straight bond issued by DeCurret DCP Inc. with maturity of ten years. We may continue to acquire new investment securities. The value of our investment securities held fluctuates due, for example, to market value, as well as business situation. The fluctuation of such fair value is recognized as either other comprehensive income or profit or loss. As for available-for-sale-equities held, their fair values are measured as equity instruments through other comprehensive income, unrealized profit (loss) of holding available-for-sale-equities due to fluctuation of fair value or realized profit (loss) (post-tax effect) due to a sale that will not be recognized as profit (loss) on the consolidated statement of profit and loss. It is not certain that we will be able to sell our investment securities held on favorable terms. Our results of operations and financial condition may be adversely impacted by the price of such investment securities sold, as well as the timing.

4. Risks regarding regulations

（1）The Telecommunications Business Act

　 IIJ, as well as some IIJ Group companies, submitted telecommunication business notifications to the MIC and operates in accordance with the Telecommunications Business Act. If we are said to have failed to protect the privacy of communications within our business operation or to have improper business operation procedures, this could cause the MIC to order us to improve such business operation procedures.
　 As IIJ is a notified telecommunication business operator, supervision by the MIC is not as strict as that to operators who need to register with the MIC. However, in accordance with the Article 41 of the Telecommunications Business Act, the MIC designated IIJ as a telecommunication operator that is obligated to maintain telecommunications facilities in compliance with prescribed technical standards, as the number of provided lines increased and our operation became more significant on the interests of users. IIJ is supervised stricter than regular notified telecommunication business operators by regulators, and if we fail to appropriately execute business activities, we could be ordered to improve our operation.
　 Additionally, in order to protect users, telecommunication business operators and their sales partners (brokers and other outsourcing resources) are subject to carry, for example, the obligation to explain important matters, the system to cancel initial contracts, and the obligation to observe sales partners’ operation, which are set forth by the Telecommunications Business Act. In addition to these, in order to create fare competition for mobile service market, various regulations such as the condition for offering mobile phones have been implemented in recent years. If we or our sales partners are said to have improper business operations, we may be asked to disclose our names to the public and take measures to improve them.
　 If we are asked to take measures to improve our practices, our results of operation and financial condition could be adversely impacted because of costs needed to take such actions and/or damage on corporate image.

（2）Regulations related to businesses

　 A number of regulations related to the usage of Internet already exist. However, discussion on the need for stricter regulations, including enhancement of measures against illegal and harmful information or defamation over Internet, stricter user identification, protection of youth and appropriate use of personal data, have continuously been made. Further legislation or self-imposed rules of the industry could be made or requiring telecommunications operators to impose counter measures. Depending on such requirement, a large amount of cost or facility investment could be necessary to comply.
　 A number of regulations related to the usage of Internet already exist. However, discussion on the need for stricter regulations, including enhancement of measures against illegal and harmful information or defamation over Internet, stricter user identification, protection of youth and appropriate use of personal data, have continuously been made. Further legislation or self-imposed rules of the industry could be made or requiring telecommunications operators to impose counter measures. Depending on such requirement, a large amount of cost or facility investment could be necessary to comply.
　 Regarding our consumer business, which comprise certain portion of our total business, in addition to the above mentioned Telecommunication Business Act, the business is subject to consumer protection related laws such as the Consumer Contract Act, Act on Specified Commercial Transactions, and the Act against Unjustifiable Premiums and Misleading Representations. If we or sales partners fail to comply, our results of operations and financial condition could be adversely impacted because of fines from regulators, other than the MIC, demands for legal responsibility, or damage to corporate image.
　 Moreover, if regulations related to our business are newly enacted or enforced more strongly, flexibility and promptness in our business execution may be weakened or our service offerings may be constrained due to our clients’ usage of our offered services.

（3）Economic Security Legislation

　 As seen in the enactments of the Economic Security Promotion Bill and the Economic Security Information Protection Act (the legistration of Security Clearance) in Japan, the promotion of economic measures to ensure national security has become increasingly important in response to changes in the international situation and socioeconomic structure. Under the Economic Security Protection Bill, there is a system for ensuring the stable provision of core infrastructure services stipulates prior examinations, recommendations, orders and others related to outsourcing the installation, maintenance, and management of critical facilities, to prevent them from being interfered with from outside Japan. Although the details of this system are not yet determined, the operation of the system may affect our plans to build data center facilities, which may in turn affect our results of operations and financial condition. In addition, such economic measures to ensure national security have been introduced outside of Japan, including in the United States, and the occurrence of restrictions on services we provide to a certain extent may adversely affect our results of operations and financial condition.

（4）Foreign regulations

　 We have affiliated companies both in Japan and overseas. Although we strive to comply with each foreign country’s regulations, depending on counties, interpretation and operation of such regulations could be unclear, thus we may unintentionally fail to comply and be pointed out about it. In such a case, our results of operations and financial condition may be adversely impacted.
　 Also, among foreign country’s regulations, there are cases in which such compliance requirements are not limited within such country’s domain, but rather apply to the entire entity. For example, if we fail to comply with the FCPA or laws related to national security in the United States and GDPR of EU, we could be faced to restrict our business activity or ordered to pay fines as a penalty.

（5）Intellectual property

　 Although we strive not to infringe on third-party patents and other intellectual property, should we fail in those efforts, we may be faced with damage claims. Also, if a crucial part of our fundamental technology is understood to have a third-party patent, or in the future a third-party is given the patent to such technology, we may be required to pay license fees to the third-party with patent in order to execute our business.
　 We aggressively apply open source software when developing and operating services; however, terms and conditions for open source software impose some issues, such as unclarity surrounding licenses, which could cause unexpected restriction on application. In addition, the utilization of AI products in our business may be restricted due to various unresolved legal issues.
　 While we impose appropriate measures to protect our intellectual property and will do so continuously, it is difficult to completely remove risks of a third-party infringing on our intellectual property rights. In such a case, our results of operations and financial condition may be adversely impacted.

（6）Law suits

　 As of this document’s filing date, there are no cases pending which would have a significant financial impact on us; however, we cannot be certain that we would not be named as a defendant in a future lawsuit including damage claims due, for example, to service interruption; delays in completion or contractual nonconformity for systems integration (including cases caused by outsourced personnel); infringement of a third-party’s rights to intellectual property; leaks or defects of clients’ data, including the secrecy of communications and personal information; improper attitudes towards clients; or improper treatment of employees or stocks. Also, we may have to choose lawsuit settlement if an agreement cannot be reached with the other party regarding price and other terms and conditions when updating and revising contracts with suppliers.
　 If these lawsuits are brought against us and are founded to be attributable to our group, or if our claims are not upheld, or if our creditability is damaged, our results of operations or financial condition could be adversely impacted.

5. Risks regarding relationships with large shareholders

（1）Background of investment by NTT Group and KDDI

　 As of this document’s filing date, NTT and NTT Communications hold 20,387,000 shares of IIJ’s common stock and 11.5% of the voting rights in combined total and KDDI also holds 20,387,000 shares of IIJ’s common stock and the voting rights of 11.5%. The two groups are equally ranked as IIJ’s largest shareholders. IIJ Group procures telecommunication lines and others from both NTT Group and KDDI and competes against them mainly in network services.
　 With regards to NTT and NTT Communications, there were the participation of NTT in IIJ’s third-party allotment of shares to enhance our capital structure in January 1996, establishment of INTERNET MULTIFEED CO. with NTT in September 1997 (later, the shareholder changed to NTT Communications due to reorganization of NTT Group), and IIJ’s third-party allotment of shares mainly to NTT and NTT Communications, in September 2003 in order to offset the financial losses due to commencement of corporate reorganization proceedings of Crosswave, our former equity method investee. As of March 31, 2023, the shareholding percentage of our common stock by NTT and NTT Communications together was 25.9% and NTT was our “other related company.”
　 With regards to KDDI, they participated in IIJ’s third-party allotment of shares to enhance our capital structure in June 1994. As of March 31, 2023, the shareholding percentage of our common stock held by KDDI was 0.9%.
　 As a response to the NTT’s intent of partially selling IIJ’s common stock, on May 18, 2023, KDDI purchased 18,707,000 shares of IIJ’s common stock from NTT with capital and business alliance agreement between IIJ and KDDI. On May 19, 2023, IIJ purchased its treasury stock through off-auction own share repurchase trading (ToSTNeT-3) of the Tokyo Stock Exchange and NTT sold 3,928,500 shares of IIJ’s common stock. In addition to the above mentioned transaction, NTT executed additional sales. As a result, the two groups’ number of shares held and the shareholding percentage became as mentioned above and NTT is no longer our “other related company.”

（2）Business relationship with NTT Group and KDDI

　 In order to provide Internet connectivity services and others, we use services provided by NTT Group and KDDI for a significant portion of access circuits, domestic and international backbone circuits, WAN lines, mobile interconnectivity and facility, data center facilities and other services. The business relationships with NTT Group and KDDI are within the ordinary course of business and there is no special arrangement due to their shareholdings.
　 NTT Group and KDDI provide services that compete with our services such as Internet connectivity services which include mobile services, WAN services, outsourcing services which include security-related services and systems integration. Although there is competition to a certain extent among IIJ and the two groups in some projects, there are no special arrangements due to their shareholdings, and IIJ Group operates its business independently.
For the fiscal year ended March 31, 2024, our revenue from NTT and NTT Communication were JPY0.3 billion and revenue from KDDI were JPY0.3 billion.

（3）Stock subscription agreement with NTT and capital and business alliance with KDDI

　 IIJ has concluded stock subscription agreement with NTT upon the third-party allotment to NTT in September 2003. This agreement does not stipulate any particularly material obligations or rights relating to the conduct of business.
　 IIJ has entered into a capital and business alliance agreement with KDDI upon KDDI’s acquisition of IIJ’s common stock from NTT in May 2023. Under this alliance, IIJ and KDDI have agreed to cooperate with each other in implementing and promoting alliances in order to achieve enhancement of corporate values of both companies to the extent that such collaboration contributes to realizing such purpose. Such collaboration includes the followings: IIJ’s optimal procurement of KDDI’s communication and other services, exploring collaboration in the business fields of KDDI and IIJ, including those of their respective subsidiaries, exploring mutual use and joint development of commercial products and other collaboration in corporate area and mobile service field of KDDI and IIJ and personnel exchanges.

（4）Outlook

　 NTT informed IIJ that NTT Group intends to hold the shares of IIJ’s common stock held for the time being as strategic holdings. KDDI informed IIJ that KDDI intends to hold the shares of IIJ’s common stock for the long term as strategic holdings. Although IIJ assumes that IIJ shall continue to have a good relationship with both groups as stable shareholders, any major change in our major shareholders, including but not limited to both groups, could have a temporary impact on IIJ’s stock price.

6. Risks regarding future funding needs

　 As of March 31, 2024, our cash and cash equivalents were JPY45.5 billion, increased by JPY3.0 billion from the previous fiscal year end. Our bank borrowings as of March 31, 2024 were JPY30.2 billion, increased by JPY9.8 billion from the previous fiscal year end. Our finance lease obligation including current portion as of March 31, 2024 was JPY15.8 billion, decreased by JPY0.7 billion. As of March 31, 2024, the balance of other financial liabilities related to operating lease recognized along with the adoption of IFRS 16 was JPY27.0 million.
　 Our investment in facilities has been increasing. We plan to continuously allocate more capital in the future for network facilities, cloud computing services-related facilities, investments and expenses needed for maintenance, updates and expansion of back office-related facilities, investments and expenses needed for service development as well as operation and business development, investments and expenses related to our own data center construction, expansion of office space along with human resources expansion, increases in operating capital along with business expansion, capital injections and/or loans for business expansion as a group, funds for M&A transactions, etc. We mainly use bank borrowing when procuring working capital, lease transactions when purchasing network equipment. Due to the changes in interest rates, we may be faced with greater interest expenses than expected. Due to changes in the business circumstance, we may be faced with greater than expected funding needs for fund raising, including future lease transactions for our business operation. There is no guarantee that we can execute such transactions on favorable terms and conditions which could impose restrictions on our business development.

7. Risks regarding dilution of equity

　 IIJ issued 18,800 thousand new shares of common stock (the number of shares after adjustment due to subsequent stock splits) by way of a public offering in July 2013 and 2,800 thousand new shares (the number of shares after adjustment due to subsequent stock splits) by way of a third-party allotment in connection with a secondary offering of shares by way of an over-allotment in August 2013. For future strategic mergers and acquisitions transactions and/or large-scale business investments, we may choose to raise additional funds from the issuance of shares of IIJ’s common stock or securities convertible into IIJ’s common stock and in that case existing shareholders may incur substantial dilution.
　 There was a stock compensation-type stock option plan for directors (excluding part-time and outside directors) and executive officers of IIJ from June 2011 to June 2024 as a substitution for the retirement benefit. This plan was revised in June 2024 to be a remuneration that is conditional on tenure as a part of restricted stocks remuneration which is described below.
　 IIJ has introduced restricted stocks remuneration for executive directors and executive officers of IIJ and its subsidiary, IIJ-Global as a substitution for a part of cash remuneration such as bonus.