Internet Initiative Japan Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥161.91B
• Operating Income: ¥15.39B
• Net Income: ¥10.13B
• EPS: ¥56.64

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Internet Initiative Japan (IIJ) delivered a solid FY2026 Q2 under IFRS with clear signs of operating leverage and resilient cash generation. Revenue grew 10.1% YoY to 1,619.10, supported by a 30.6% YoY increase in operating income to 153.88, indicating meaningful margin expansion. Gross profit reached 306.71 with a gross margin of 18.9%, and operating margin stood at 9.5% (153.88/1,619.10), up meaningfully given the faster growth in operating income versus revenue. Net income rose 34.2% YoY to 100.32, translating to a net margin of 6.2% and basic EPS of 56.64 yen. DuPont analysis shows ROE of 6.7% derived from a 6.2% net margin, asset turnover of 0.492x, and financial leverage of 2.20x, consistent with the reported equity ratio of 45.1%. EBITDA was 307.46 (19.0% margin), highlighting a capital- and depreciation-intensive model (D&A of 153.58 nearly equals operating income). Operating cash flow was 105.27, equating to an OCF/Net Income ratio of 1.05x, which supports the quality of earnings. Free cash flow was slightly negative at -18.53, driven by investing cash outflows (-123.80), including capex of -60.96, suggesting active growth investment. The balance sheet remains sound with total assets of 3,292.60 and total equity of 1,497.19 (equity ratio 45.1%), while short-term loans of 336.16 are roughly balanced by cash and equivalents of 325.34. Debt-to-equity stands at 1.14x, indicating moderate leverage for the sector. The effective tax rate was 23.6%, and minor net non-operating expenses are implied by the delta between operating income and profit before tax. Dividend affordability is mixed: the payout ratio is 64.0% on earnings, but FCF coverage is negative (-0.29x) this period due to heavier investment. Liquidity ratios cannot be computed due to unreported current liabilities, and several non-operating and line-item details are unreported, limiting granular diagnostics. Overall, the quarter demonstrates healthy top-line growth, margin expansion, and adequate cash earnings, offset by near-term negative FCF from investment and moderate leverage that should be monitored as capex persists.

Profitability Analysis

ROE decomposes to 6.7% = 6.2% net margin x 0.492x asset turnover x 2.20x leverage. Operating margin is 9.5% (153.88/1,619.10), reflecting robust operating leverage as operating income grew 30.6% YoY versus 10.1% revenue growth. Gross margin at 18.9% suggests cost discipline and/or richer mix in higher value services relative to prior periods, though prior-period margins are not disclosed. EBITDA margin of 19.0% and D&A of 153.58 indicate a depreciation-heavy model; EBITDA-to-Operating Income ratio of ~2.0x underscores significant non-cash charges consistent with network and data center assets. Net margin of 6.2% trails operating margin due to taxes (23.6% effective rate) and small net non-operating items (PBT 151.49 vs OI 153.88). Asset turnover at 0.492x points to moderate capital intensity; improvements here would bolster ROA and ROE. Financial leverage at ~2.20x (equity ratio 45.1%) aids ROE without appearing excessive, but contributes to sensitivity in downturns. Margin quality appears sound given OCF/Net Income of 1.05x, aligning earnings with cash generation. With D&A nearly equal to operating income, sustaining EBIT growth will likely depend on continued revenue scaling and cost efficiency rather than D&A relief.

Growth Assessment

Revenue increased 10.1% YoY to 1,619.10, indicating healthy demand across the portfolio. Operating income rose 30.6% YoY to 153.88, implying favorable mix, scale benefits, and cost control. Net income grew 34.2% to 100.32, outpacing revenue growth and signaling improved profitability. The EBITDA increase to 307.46 (19.0% margin) highlights strong underlying earnings power despite substantial D&A. While segment detail is unreported, the combination of higher margin and stable tax rate supports the view that growth is not purely accounting-driven. Sustainability depends on continued order flow and utilization of existing network capacity; asset turnover at 0.492x suggests room for efficiency gains as volumes scale. Investing cash outflow of -123.80 and capex of -60.96 indicate ongoing capacity expansion, which, if monetized effectively, should support medium-term growth. Equity-method income is slightly negative (-0.91), immaterial to the overall growth profile. Outlook: continued double-digit revenue growth may moderate as the base enlarges, but margin momentum could continue near term given demonstrated operating leverage; visibility is constrained by lack of segment and backlog disclosures.

Financial Health

Total assets are 3,292.60 and total equity is 1,497.19, yielding an equity ratio of 45.1% and financial leverage of ~2.2x. Total liabilities are 1,703.49, with debt-to-equity at 1.14x, indicating moderate leverage. Short-term loans are 336.16 and cash & equivalents are 325.34, suggesting near balance between immediate debt and cash. Current assets total 1,301.95, but current liabilities are unreported, so current and quick ratios cannot be assessed. Accounts payable are 302.38, consistent with the scale of operations; inventories are modest at 46.81, reflecting a services-heavy model. Long-term debt data are unreported, limiting duration risk analysis. Interest coverage cannot be calculated due to unreported interest expense; however, EBITDA of 307.46 suggests headroom assuming typical borrowing costs. Capital structure appears balanced for the business model, but reliance on short-term loans warrants monitoring if credit conditions tighten.

Cash Flow Quality

Operating cash flow of 105.27 versus net income of 100.32 yields OCF/Net Income of 1.05x, supporting earnings quality. Free cash flow was -18.53, driven by capex of -60.96 and broader investing outflows (-123.80), implying active investment rather than weak cash earnings. Working capital details are limited; current assets are 1,301.95, but current liabilities are unreported, so changes in receivables/payables cannot be dissected. D&A of 153.58 closely matches operating income, highlighting that EBIT is largely non-cash; cash conversion thus relies on OCF rather than EBIT optics. Financing cash flow was -97.29, including dividends paid of -30.38; other components (debt drawdown/repayment) are unreported by detail. Cash & equivalents are 325.34, providing a buffer to fund near-term investments despite negative FCF this period. Overall, cash generation aligns with reported profit, with negative FCF reflecting growth spending rather than deterioration in core cash earnings.

Dividend Sustainability

The calculated payout ratio is 64.0%, indicating dividends are covered by earnings this period. However, FCF coverage is -0.29x, meaning dividends were not covered by free cash flow due to elevated investment outflows. Dividends paid were -30.38, and share repurchases are unreported. With cash & equivalents of 325.34 and moderate leverage (D/E 1.14x), near-term liquidity supports dividends, but sustainability depends on future FCF normalization. Given OCF/NI of 1.05x, underlying cash earnings quality is adequate; the key variable is the level and timing of capex and other investments. Policy outlook cannot be inferred as DPS and guidance are unreported; absent guidance, a stable-to-progressive policy would require either improved FCF or access to financing without materially weakening leverage metrics.

Risk Assessment

Business Risks:

• Operating leverage to revenue growth; a slowdown could compress margins after recent expansion
• Competitive pricing pressure in network and cloud services could weigh on gross margin (18.9%)
• High depreciation burden (153.58) may cap EBIT growth if revenue scaling slows
• Execution risk in monetizing recent investments (capex -60.96; investing CF -123.80)
• Potential customer concentration or large-project timing risk (not disclosed)
• Technology and cybersecurity risks inherent to ISP/cloud operations

Financial Risks:

• Moderate leverage (D/E 1.14x) and reliance on short-term loans (336.16)
• Negative FCF this period (-18.53) creates funding needs if investment remains elevated
• Interest coverage unassessable due to unreported interest expense; sensitivity to rate environment
• Liquidity assessment constrained by unreported current liabilities and cash detail granularity
• Potential refinancing risk if credit markets tighten

Key Concerns:

• Sustainability of margin expansion given D&A-heavy cost base
• Conversion of growth investments into revenue/EBITDA to restore positive FCF
• Visibility limits from unreported non-operating and working capital details

Investment Implications

Key Takeaways:

• Strong operating leverage: revenue +10.1% YoY vs operating income +30.6% YoY
• Healthy cash earnings: OCF/Net Income 1.05x supports profit quality
• Margins improving: operating margin 9.5%, EBITDA margin 19.0%
• Moderate leverage with solid equity buffer: equity ratio 45.1%, D/E 1.14x
• Negative FCF (-18.53) driven by elevated investing outflows; watch capex discipline
• Dividend covered by earnings (64% payout) but not by FCF this period (-0.29x)

Metrics to Watch:

• Operating margin and gross margin trajectory
• OCF/Net Income and FCF recovery as investments normalize
• Capex intensity and investing cash outflows
• Debt mix and maturity profile (short-term loans vs long-term)
• Asset turnover (0.492x) as a proxy for utilization and scalability
• Tax rate stability (23.6%) and any non-operating income/expense shifts

Relative Positioning: Within Japan’s network services and IT solutions cohort, IIJ exhibits mid-teens EBITDA margin (19.0%) and moderate balance-sheet leverage (D/E 1.14x) with a relatively high equity ratio (45.1%), positioning it as operationally efficient and conservatively capitalized versus more highly leveraged telecom operators, while showing stronger operating leverage than many IT services peers this quarter; however, its D&A-heavy profile and negative FCF from investment underscore a continued need for disciplined capital allocation.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
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