When is an ISP not just an ISP? When it branches out to more lucrative sectors such as outsourcing and systems integration for blue-chip corporate clients. That's what Internet Initiative Japan (NASDAQ:IIJI) did in the post-bubble era, with impressive results.

The dot-com boom and bust
IIJ began as an ordinary dial-up Internet service provider in Japan in 1993. It added firewall software in 1994, then branched out into broadband and IP services for commercial clients by 1998. Like many of the dot-coms from that era, IIJ's stock price shot up to the obligatory triple-digit level, and then it tumbled just as rapidly back to the low single digits. Despite a couple of forays into the low teens, IIJ has almost always traded for less than $10 since the bubble popped.

New directions
IIJ stayed busy in the wake of the tech implosion. Despite the seemingly endless recession in Japan, the company set out to become a top provider of data services and consulting to blue-chip corporate clients and government offices. Revenues grew from $334 million in the fiscal year that ended in March 2002 to $471 million over the past 12 months.

The growth came from two new revenue sources: system integration and IP-based outsourcing. IIJ discovered that it could take clients in one product area and sell them services in others, to create what IIJ calls the "total network solution." A customer who uses IIJ for its broadband Internet service, in other words, will often also use its 13 data centers to outsource firewalls, email, and Web hosting, or to contract for more advanced services such as network management and optimization.

Today, IIJ has more than 6,500 customers, including Japan's top companies and many of its government offices. IIJ found that the old telecom companies such as NTT (NYSE:NTT) were not sufficiently IP-focused, while hardware shops such as NEC (NASDAQ:NIPNY), Fujitsu, and even IBM (NYSE:IBM) were still mainframe-oriented. So it took advantage of that situation and benefited from Japanese customers with balky legacy mainframe IT systems, who have since looked to IIJ to design and implement entirely new server-based IP-service systems.

Continuous innovation
IIJ survived the dot-com implosion because it found innovative new ways to make profits. That innovation hasn't stopped. Today, it's partnering with U.S.-based GDX Logic to create secure, private email networks for corporate customers. IIJ's 13th data center, meanwhile, opened in Tokyo earlier this month. And just days before that, it announced the creation of a new high-definition content-delivery platform for peer-to-peer delivery of high-definition video to customers. It's not hard to see that platform growing, as more and more content providers add HD downloads to their offerings.

IIJ is even moving into the new world of RFID-based supply chain and inventory control. It's partnering with BEA Systems (NASDAQ:BEAS) to create a network environment that meets EPCglobal network standards.

By the numbers
No analysts cover IIJ in the open media, but the numbers speak pretty well for themselves. In the company's nine-month report for the period that ended in December, the company reported revenues spread evenly over ISP services, outsourcing, system construction, and other services and equipment sales. Sales rose 19% over the same period in 2005, with an accompanying improvement in margins. That is an important trend; small increases in margins yield fat profit growth in IIJ's business model.

System integration was the primary growth driver in 2006. Outsourcing provided more recurring income for high-margin services, and ISP revenue began to grow again.

IIJ's traditional metrics fit my value model for services firms -- trailing price-to-sales at 1.6, trailing price-to-earning of less than 15, and a return on equity at a sparking 31.5%.

The lack of analyst coverage means we have to look at IIJ on our own, in true Foolish fashion. In addition to the gradual economic recovery in Japan, I see a dynamic young firm that moves into new profit sectors whenever it can. The diversified revenue and customer base should shield IIJ from all but the worst economic reversals. And even with the stock up more than 200% off its post-bubble lows, there is plenty of room to keep growing in the coming years.

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Fool contributor Dale Baker, a private-client portfolio manager and former U.S. diplomat with extensive experience in Europe and Africa, owns IIJ shares. He welcomes your questions or comments. The Motley Fool has a disclosure policy.