OREANDA-NEWS. March 10, 2010. OAO ARMADA (MICEX, RTS: ARMD) announced preliminary financial results for the financial year of 2009, which ended on December 31, 2009.

“The company’s main goals for the year as defined by the management — to increase profitability and retain the market share — have been attained. EBITDA margin stood at 12% — more than double the figure for 2008, even despite the IT market’s 45% drop in 2009. In order to attain the desired level of profitability, the company optimized its expenditures by 50 percent and gave up a number of low-margin tenders in the hardware solutions sector. In 2010, we plan for the company’s EBITDA margin to range between 12% and 14%, excluding purchases. Furthermore, we are poised to complete several M&A transactions which had been postponed in the highly profitable IT services and software development sectors. In 2011—2012, we forecast significant growth in IT solutions for the public sector (it currently accounts for about 20% of the market). Meanwhile, the software development sector is expected to see the highest growth, since the creation of e-government, the possibility of the public sector’s transition to open source software and other initiatives have all been officially supported by the Russian President and the government in 2009, and the federal target programs are being developed. ARMADA has captured a significant share of the software development market in the public sector and will actively participate in these long-term projects,” Alexei Kuzovkin, Chairman of the Board of Directors of OAO ARMADA observed.

ARMADA’s revenue structure in 2009:

RUB ‘000,000

2009

2008

Change (%)

Revenue

3,291

5,125

-36%

Software Development

938

1,655

-43%

IT Services

943

1,281

-26%

Hardware Solutions

1,410

2,189

-36%

EBITDA

395

294

34%

EBITDA, % of revenue

12,0%

5,7%

109%

Revenue and EBITDA. The company’s revenue in 2009 amounted to RUB 3.3bn (approx. USD 111m), 36% lower than in 2008. EBITDA jumped 34% to RUB 395m (approx. USD 13.4m) and amounted to 12% of revenue. The latter figure complies with the forecast made at the beginning of the 2009. Software development and IT services segments accounted for the highest increase. In the total revenue mix, the two sectors accounted for 57% of ARMADA’s total revenue, and contributed 85% of the total amount of EBITDA.

Expenditures. The company reduced its staff and salaries, revised its contracts with subcontractors, cut down on its administrative and organizational expenses, and suspended some of its low-marginal projects in the hardware solutions segment. By implementing the optimization program, the company managed to reduce its expenses by more than 50% against the level of 2008.

Debt burden. In the first quarter of 2009, ARMADA repaid a USD 16m loan, taken out from Halyk Savings Bank of Kazakhstan JSC and NBK Bank OJSC to finance future acquisitions. At that time, due to the high level of uncertainty concerning the Russian market’s future, the company preferred to put off acquisitions and eliminate possible risks. As of December 31, 2009, the company has no debt burden.

Market. The Russian IT market, according to experts’ estimates, shrank 45% to RUB 396bn (approx. USD 13.4bn) in 2009. ARMADA’s market share stood at 0.8% (0.7% in 2008 and 0.6% in 2007). Historically, the company has always demonstrated growth exceeding that of the general market’s growth:

%

2009

2008

2007

Company’s revenue rise, %

-36%

27%

62%

Market growth, %

-45%

11%

27%

The government is one of the largest customers on the market; federal authorities placed orders in the IT sector worth about RUB 60bn in 2009, while purchases of municipalities amounted to RUB 20bn, which totals 20% of the Russian IT market. Software development and IT services comprise key growth factors of this huge market segment, since Russia lags rather far behind developed countries in this field (it currently ranks 60—70th in the state informatization rating). In 2009, both the President and the Prime Minister took a number of steps to remedy this situation. Programs initiated by the government are aimed at attaining these goals in 2011—2015, and the most significant investments are expected to be made in 2011—2012. Specifically, the foundations for the federal target program Information Society 2011—2018 were laid in 2009, and its key project is Electronic Government 2011—2015. This program is meant to replace another federal target program, Electronic Russia, which expires in 2010. The key idea of the new program is for government structures to start using open source software, to introduce the Software as a Service (SaaS) model for state software, and to create a prototype of the Silicon Valley in the Moscow region, as well as other projects financed by the government.

Clients. The company’s client base is highly diversified: in 2009, no single client contributed more than 10% of business. In the revenue structure, just as in previous years, public sector customers and companies partially owned by the government accounted for 75% of revenue, while another 10—12% was provided by the financial sector (a 7% rise from 2008). ARMADA’s market share in the IT segment for the public sector stood at about 3% in 2009. More than a half of all federal structures are ARMADA’s customers.

Key projects. In 2009, ARMADA partially completed the task of putting public services provided by government agencies online. The project was delivered as part of the Electronic Government 2011—2015 program, and the plans for 2010—2011 involve considerably stepping up the activities subject to government order 1555-R dated October 17, 2009, which sets out the schedule for bringing high-priority public services online starting March 2010.

The company developed an open source software package for schools, which was approved by the President in 2009 and is already in use in schools. Each year, Russia purchases foreign software worth over RUB 30bn. The share of foreign software in Russia currently stands at 82%, while in the U.S., for example, it is only 10%. This dependency clearly poses a risk for Russia’s national security. Open source software may become the basis for the typical work system of public officers. Open source software is an actual alternative to existing software, and has similar functions, but no license fees are required for its use. The saved funds may be used to finance the work on software installation, maintenance, and modernization.

Software Development. Revenue from hardware solutions amounted to RUB 938m (USD 32m), having dropped 43% against 2008. Conversely, EBITDA margin rose significantly in this segment. The segment is represented primarily by Armada Soft and ETC. The company’s priority in 2009 was to launch operations in new strategic projects in the sphere of software development for government structures.

In addition to the major projects specified above, the company won a tender for the contract to develop an automated system to register traffic violations. The solution includes the integration of interdepartmental information systems — an area in which ARMADA has extensive experience. The system could be spread further regionally with the help of public private partnerships.

In 2009, ETC signed contracts for the implementation of the State Purchases system at the Finance Ministry of Russia and the Federal Customs Service, and also completed the implementation of the purchases system at the Agricultural Ministry. Among the company’s current clients are 12 regions, about 200 municipalities of the first and second level, and a number of commercial entities, such as Mechel.

In April, ARMADA ranked second in the Software development sector in the Expert RA Rating Agency’s rating of Russia’s largest IT companies. In December, ARMADA’s Chairman of the Board of Directors Alexei Kuzovkin was included in the pool of high-potential managers under the patronage of the Russian President.

IT Services. The business generated RUB 943m (USD 32m) in revenue, showing a decline of 26 percent against 2008’s result, while EBITDA margin shot up. Within ARMADA, the segment is represented by Soyuzinform and PM Expert (outsourcing), and Helios IT-Solutions (systems integration, IT consulting).

The company succeeded in extending agreements with major governmental agencies that contracted ARMADA in 2009 to provide IT outsourcing services by maintaining their entire IT infrastructures. The Finance Ministry, the Federal Treasury and a whole range of other clients are among those who have consistently favored the company’s specialists for years. Meanwhile, new customers included the Health and Social Development Ministry and the Federal Financial and Budget Supervision Service of Russia.

PM Expert implemented a number of successful projects and R&D tasks in order to streamline and effectively regulate project activities, provide information and analytical support for innovative projects and automate project management for the Industry and Trade Ministry of Russia, United Aircraft Building Corporation, and Atomenergoprom. PM Expert spearheaded and co-authored the basic series of national project management standards which are now past the stage of public discussions.

The new business segment of project management outsourcing (PM Expert), including Technical Customer service (Soyuzinform), grew substantially. As such, Soyuzinform provided the successful management of construction projects for smart buildings for Russia’s

Supreme Arbitration Court in Moscow and across nine regions. The contractor’s budget is usually proportionate to the budget of the project that it manages.

Helios IT-Solutions’ consulting unit deployed one of Russia’s largest IT resources management systems at KMB Bank, and also has a number of information security projects up and running.

Hardware Solutions. The segment earned RUB 1,410m (USD 48m), down 36% from 2008’s level. The contribution of the segment represented by Helios IT-Solutions within ARMADA to the group’s total revenue contracted from 47% in 2007 to 43% in 2009. Last year, the company opted out of a string of low-margin tenders in a bid to increase its profitability.

Helios IT-Solutions produces elements of associated integration solutions — a factor driving ARMADA’s revenue in the IT services segment. The company’s method for generating added value for equipment is to produce tailor-made hardware to meet the needs of governmental law enforcement agencies. Helios IT-Solutions counts such end users as governmental and commercial organizations, and financial institutes including the Bank of Russia, VTB Bank, Alfa-Bank, Bank Societe Generale Vostok, Uniastrum Bank, Sberbank of Russia, VTB-Rosno, Reso Garantiya, and many more among its clients.

Competition. The dramatic fall of the market in 2009 put the IT companies’ ability to adapt quickly and make swift changes to a severe test. Many smaller companies were forced out of business altogether, while a number of larger players who were not swift enough to streamline their personnel costs or repay debts suffered severe losses in their margins, which has in turn made them quite vulnerable in 2010. Competition is toughest in the hardware sector, since prices in this sector are often set through auctions. Competition is relatively lower in the software development and IT services segments, with expertise and the track record of successful projects implemented being of great importance in determining the winner. The sector of IT services for government needs is fairly inaccessible for foreign companies, which subsequently compels them to work through their Russian partners. As the market expands, in 2012—2014, takeovers of Russian market players by foreign companies are likely to begin.

2010 Forecast

The management’s goal for 2010 is to keep up its policy of continued organic growth and takeovers, thus boosting the group’s EBITDA margin to 12—14% (without the effect of acquisitions).

GDP growth could become the IT market’s growth driver for 2010. Presumably, the long term trend will be towards a rise in the IT market share in GDP, from the current 1.02% (1.74% in 2008) to 2—4% — a typical rate for developed countries. The global IT market will expand 3—5% in 2010, while Russia, in IDC’s estimation, will be among the most promising regions, with its IT market growing by 8 percent. The growth rate will be largely linked to deferred demand and government support.

In 2010—2011, ARMADA’s core business will focus on designing and developing off-the-shelf software solutions for the public sector, as it boasts significant expansion potential and ARMADA already commands an essential market share (3%), not to mention a competitive edge thanks to its expertise.

In 2010, the group’s management plans to close a few deferred M&A deals in highly profitable IT services and software development segments. At the inception stage, a number of deals could be paid for with ARMADA shares. To this end, just a few percentage points at the group’s disposal should be enough.

The management will use their best efforts to bring about an annual rise in the group’s revenue of about 25—30% a year, which will then translate into a market share of 3—5 percent in the midterm: the key objectives will be high-margin sectors, software development and IT services. They will also bear a rise from 12% to 16—18% in terms of EBITDA margin.