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M c I n t i r e I n v e s t m e n t I n s t i t u t e1
McIntire Investment InstituteAt the University of Virginia
Internet Initiative Japan, Inc. (IIJI)
Prepared by Sean Xiaoyi Yu| March 29th 2012
M c I n t i r e I n v e s t m e n t I n s t i t u t e
• Business Overview• Stock Chart & Statistics • Thesis points • Misconception • Catalyst • Risk
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M c I n t i r e I n v e s t m e n t I n s t i t u t e3
• telecommunications company
• ISP (NTT NEC)
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Stock Chart & Statistics
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• D
• Beta: 0.56 P/E (ttm):3.88• Day's Range: 8.22 - 8.30 EPS (ttm):2.12• 52wk Range: 6.67 - 11.78 P/B: 670.83• Market Cap: 666.42M•
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Leading position in the cloud computing marketLeading position in the cloud computing market
Sustainable business model Sustainable business model
Global expansion prospectsGlobal expansion prospects
Efficient operation and cost managingEfficient operation and cost managing
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
• Global cloud computing market:$37.8 Billion (2010) - $121.1 Billion (2015) – 421 Billion (2020)
• Zoom in Japanese market :
• 400% growth!
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Leading position in the cloud computing market
M c I n t i r e I n v e s t m e n t I n s t i t u t e
IIJ’s Cloud service – IIJ GIO
• GIO is IIJ’s Cloud Computing services, launched at 2009.
• Three advantages.
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
• (1) supports a wide range of needs
• provide them with large number of clients
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
• (2) 1,080 combinations enable flexibility equal to individual system integration.
• flexibility9
M c I n t i r e I n v e s t m e n t I n s t i t u t e
• (3) low cost due to economies of scale
• Low costs and continued effort for cost reduction.
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Next Generation Datacenter
• first container data center
• low-cost
• high-server density
• scalability need
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Revenue and growth
• 9 months: JPY2.0 billion, up 656.2%
• FY10: JPY0.6 billion
• Feb. 2nd 2012:• JPY3.0 billion in FY2011.• Great revenue in Q4 (Jan. to Mar.)
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Growth is not only financially
• The projects GIO is working on increase a lot
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Award
• The best cloud services in Japan in 2011• The Best Hyper-V Partner of the year 2011 by
Microsoft.
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Competitors
•• Not do cloud related service in Japan•
• Enterprise cloud computing company• The SaaS and PaaS level. •• Leader in the integration of IT • Choice of software service limited
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M c I n t i r e I n v e s t m e n t I n s t i t u t e16
• But IIJ launched “IIJ Earthquake Early Warnings Distribution Service” right after the disaster.
M c I n t i r e I n v e s t m e n t I n s t i t u t e
• Recurring Business Mode
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Sustainable business model
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Clients
• 6500 clients
• blue-chip big companies• government agencies
• NTT
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M c I n t i r e I n v e s t m e n t I n s t i t u t e19
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Clients are leaders
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Nov. 2011
Feb. 2012
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Insensitive about market shock
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Not depend on any Industry Not depend on any companies
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Constantly innovation
• IIJ Innovation Institute Inc. 2008
• “next generation Internet” , “cloud 2”.
• Three services and products since February, 2012.
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
• “IIJ and China Telecom partnership to jointly provide cloud computing services in China”
• 50% • China -- 67.5%• Singapore – 90%• U.S. – 95%
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Global expansion
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Right choice of partner
• China Telecom is the largest carrier in China
• >60% market share
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
IIJ GIO US
•Mature business model
•“Old clients”
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Other expansion plan
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
• Acquisition of AT&T• June 1, 2010• Domestic business from AT&T Japan
• Sep. 2010. IIJ Global solution
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Efficient operation and cost managing
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Gain a lot
• 1,600 blue-chip corporate clients
• Strong WAN service & big market
• Sales increase because of tie-ups with IBM
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
WAN Service
• Increase a lot!29
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Other Increase
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0
1,000
2,000
3,000
4,000
5,000
6,000
101Q 102Q 103Q 104Q
Gross margin
Gross margin
0
20
40
60
80
100
120
101Q 102Q 103Q 104Q
Research and development
Research anddevelopment
0
200
400
600
800
1000
1200
1400
1600
1800
101Q 102Q 103Q 104Q
Operatingincome
Net income
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Trend of SG&A
• Selling, General and Administrative Expenses
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0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1 2 3 4 5 6 7
SG&A
Series1
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
1 2 3 4 5 6 7
SG&A/Total Revenue
Series1
Good at Manage cost
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Misconception
• About Statistics
• P/B ratio: 630 in Yahoo Finance
• 1.62• Too attractive?
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Two other effects
• (1)IFRS accounting in stead of U.S. GAAP. • (2) jump in the goodwill and intangible asset
• 2• ISP: 5.5 Technology: 3.43
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0
2,000
4,000
6,000
8,000
10,000
12,000
As of March31, 2009
As of March31, 2010
As of March31, 2011
As of Dec.31, 2011
Goodwill and Other Intangible assets
Goodwill and Other Intangibleassets
M c I n t i r e I n v e s t m e n t I n s t i t u t e
P/E
• 3.7 in Yahoo, too low
• 14.11 • 44.66 for ISP and 16.66 for Technology
• Undervalued
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
2. Bad performance in 2011 Q1
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• But only system construction revenue (one time)
• Cancellation of old network services
• Exemption of service fees
M c I n t i r e I n v e s t m e n t I n s t i t u t e
• initial costs burden of IIJ Global• Purchased goods such as
equipment
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Downgrade by some analytic companies
• Debt-to-equity ratio• 63.84 % IIJ• 31.67% for ISP industry
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
• technology industry is 110%• 63% is fine
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Growth rate is much lower
• IIJ 31.10%, ISP Industry: 60%• Two outliers:
• And the growth rate for the Technology industry is 30%
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Qihoo 360 Technology Co. Ltd. A [QIHU]
115.60% 3B
Tudou Holdings Limited [TUDO] 65.00% 944.1M
Internet Initiative Japan, Inc. [IIJI] 31.10% 613.7M
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Decreasing R&D
• Low R&D Unsustainability
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0
20
40
60
80
100
120
1Q 2Q 3Q 4Q 1Q 2Q 3Q
Research and development
Research and development
M c I n t i r e I n v e s t m e n t I n s t i t u t e
My VAR
• “the R&D expanse in our statement is only about our basic technology R&D, which are most conducted by our subsidiary, IIJ innovation Institute”
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
• “therefore the cost and service relating to each product or service are in our costs.”
• Specialization • Part of the R&D expense goes in to cost
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Catalyst
• Expected great preform in Q4 2011
• Mar 31st
• Financial statement come out at May.
• confidence in cloud computing service • A growth trend for the Q4
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0
5,000
10,000
15,000
20,000
25,000
30,000
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Total revenues
Total revenues
0
1,000
2,000
3,000
4,000
5,000
6,000
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Gross margin
Gross margin
M c I n t i r e I n v e s t m e n t I n s t i t u t e
The expansion drag the price up
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Risk
• hard for the investors to gain confidence
• raising competitor in cloud-computing industry.
• Lack of ability to open more international market.
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M c I n t i r e I n v e s t m e n t I n s t i t u t e49
