Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

Internet Initiative Japan / Equity Bottom-Up

<ul>
<li>Revenue grew 4% in Q3 despite an acceleration in mobile erosion as core fixed-line revenue growth remained robust.</li>
<li>Revenue growth unlocks operating leverage as margins reached record levels helped in part by lower mobile interconnect charges from DoCoMo.</li>
<li>We remain at Buy and consider IIJ a core telecom holding in Japan</li>
</ul>


Revenue grew 4% in Q3 despite an acceleration in mobile erosion as core fixed-line revenue growth remained robust.
Revenue growth unlocks operating leverage as margins reached record levels helped in part by lower mobile interconnect charges from DoCoMo.
We remain at Buy and consider IIJ a core telecom holding in Japan


IIJ (Buy) - Q3 21 Results Reaction: Core Business Drives Record Quarter

<p><a href="https://www.smartkarma.com/entities/internet-initiative-japan" target="_blank" data-smartkarma-citation="entities:10444:1" rel="noopener">Internet Initiative Japan (3774 JP)</a>  posted Q2 results that blew by consensus and Redex expectations fueled by increasing demand for telecom services from enterprises matched by margin improvement from scale economies. That drives a 26% upward revision in management guidance for current year operating income with a corresponding increase in DPS . This is the fourth time in five quarters that management has posted guidance above market expectations and we would view new targets as a minimum for what is achievable. IIJ is the closest we have to a pure play on corporate IT spend in Japan and today’s financial report underscores that yet again. We are raising our target price from ¥4,300 to ¥5,150 and remain at Buy.</p>

Internet Initiative Japan (3774 JP)  posted Q2 results that blew by consensus and Redex expectations fueled by increasing demand for telecom services from enterprises matched by margin improvement from scale economies. That drives a 26% upward revision in management guidance for current year operating income with a corresponding increase in DPS . This is the fourth time in five quarters that management has posted guidance above market expectations and we would view new targets as a minimum for what is achievable. IIJ is the closest we have to a pure play on corporate IT spend in Japan and today’s financial report underscores that yet again. We are raising our target price from ¥4,300 to ¥5,150 and remain at Buy.

IIJ Q2 21 Results Reaction: Setting the Pace for Industry to Follow

Equity Analyst, Event-driven, Quiddity Advisors

Janaghan Jeyakumar, CFA

Equity Analyst, Event-driven

Quiddity Advisors

Pan-Asia Catalysts/Events

Event-Driven

<div><p>JPX-Nikkei 400 is composed of common stocks whose main market is the TSE1, TSE2, JASDAQ, and Mothers sections (which will become the Prime Market, Standard Market, or Growth Market next April) of the Tokyo Stock Exchange. This is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents selected based on several factors including market capitalization, trading value, operating profits, and ROE.</p></div><div><p>A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. This review is conducted using the final business day of June as the base date. </p></div><div><p>Quiddity provides quantitative research on pre-event basket strategies surrounding this Index Rebalance event and others. Below is a look at potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2022 based on trading data as of end-October 2021.</p></div>

JPX-Nikkei 400 is composed of common stocks whose main market is the TSE1, TSE2, JASDAQ, and Mothers sections (which will become the Prime Market, Standard Market, or Growth Market next April) of the Tokyo Stock Exchange. This is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents selected based on several factors including market capitalization, trading value, operating profits, and ROE.A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. This review is conducted using the final business day of June as the base date. Quiddity provides quantitative research on pre-event basket strategies surrounding this Index Rebalance event and others. Below is a look at potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2022 based on trading data as of end-October 2021.

JPX-Nikkei 400 Rebalance 2022: Leader Board End-Oct 2021

Thematic (Sector/Industry)

<p>The Nikkei reports the Ministry of Industry Affairs and Communications (MIC, the regulator) will not allow NTT’s local exchange companies to give a wholly owned DoCoMo preferential treatment. This is not surprising and whilst it may modestly impact sentiment in the near-term, the real issue is competition in selling integrated fixed-wireless services to corporate users and that will develop no matter how NTT is regulated.  Meanwhile, a shift in political and regulatory focus away from mobile pricing is good news for everyone and we remain overweight with NTT as our top pick.</p>

The Nikkei reports the Ministry of Industry Affairs and Communications (MIC, the regulator) will not allow NTT’s local exchange companies to give a wholly owned DoCoMo preferential treatment. This is not surprising and whilst it may modestly impact sentiment in the near-term, the real issue is competition in selling integrated fixed-wireless services to corporate users and that will develop no matter how NTT is regulated.  Meanwhile, a shift in political and regulatory focus away from mobile pricing is good news for everyone and we remain overweight with NTT as our top pick.

Japan Telecom Sector - Regulator to Signal Level Playing Field for DoCoMo

<p><a href="https://www.smartkarma.com/entities/internet-initiative-japan" target="_blank" data-smartkarma-citation="entities:10444:1" rel="noopener">Internet Initiative Japan (3774 JP)</a> posted Q1 21 results that were slightly light versus consensus revenue but again well ahead on profitability.  Improvements in gross margin are the main driver as higher sales fall on a fixed cost base. As a result, operating income more than doubled YoY and net income tripled, accelerating on the already high growth rates seen last year and are on track to exceed full-year targets. These results highlight how IIJ, with 88% of sales (FY20) from business users, is well positioned to benefit from ramping corporate IT investment and we remain at Buy.  </p>

Internet Initiative Japan (3774 JP) posted Q1 21 results that were slightly light versus consensus revenue but again well ahead on profitability.  Improvements in gross margin are the main driver as higher sales fall on a fixed cost base. As a result, operating income more than doubled YoY and net income tripled, accelerating on the already high growth rates seen last year and are on track to exceed full-year targets. These results highlight how IIJ, with 88% of sales (FY20) from business users, is well positioned to benefit from ramping corporate IT investment and we remain at Buy.  

IIJ (Buy) - Q1 21 Results Reaction: Margin Expansion Accelerates

Japan

Internet Initiative Japan Inc. provides Internet connection services for businesses.  The Company also provides system integration services and sells system equipments.  Internet Initiative Japan offers a variety of services, including network consulting, security, and Web hosting as well.

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Internet Initiative Japan (3774 JP)

IIJ (Buy) - Q3 21 Results Reaction: Core Business Drives Record Quarter

IIJ is on track to meet and probably exceed full-year guidance as growth in new services revenue for corporate users highlights IIJ’s exposure to...

Kirk Boodry

IIJ Q2 21 Results Reaction: Setting the Pace for Industry to Follow

IIJ is the closest to a pure play on corporate IT revenue in Japan and today's beat-and-raise versus middling results for larger players highlights...

Kirk Boodry

JPX-Nikkei 400 Rebalance 2022: Leader Board End-Oct 2021

In this insight, we take a look at the potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2022 based on trading...

Janaghan Jeyakumar, CFA

Japan Telecom Sector - Regulator to Signal Level Playing Field for DoCoMo

The regulator will block preferential pricing for DoCoMo within NTT. This is not surprising. The real issue is competition for enterprise users...

Kirk Boodry

IIJ (Buy) - Q1 21 Results Reaction: Margin Expansion Accelerates

IIJ beat profitability expectations by a wide margin yet again, fueled by higher spending from corporate customers in growth areas like IoT, cloud...

Kirk Boodry

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