Yesterday's report by Vedomosti highlighting staff cuts in Russia's IT sector provided some very stark figures for 4Q08.  Among the 25 companies polled:

• 44% implemented staff cuts.
• Only 20% increased their staff.
• 38% reduced wages for existing staff.

Staff cuts at Armada in 4Q08 turned out larger than we'd expected, with 20% of the staff cut and remaining employee wages reduced 15%.  In light of the company's large reliance on contracts with government entities and state-owned companies, we expect Armada's 2009 revenues to be relatively resilient to the crisis.  The larger than expected staff cut in 4Q08 can be interpreted in four ways:

• Armada may be bracing for a larger drop in revenues than we're forecasting (we expect a 0-10% y-o-y drop in the group's consolidated RUB-denominated revenues in 2009).
• The company may be having trouble attracting additional government contracts.
• Contracts from sectors of the economy hit hard by the crisis (banks, telecoms, oil & gas, construction) may have fallen more than we expected.
• The staff cuts may be concentrated in the group's hardware solutions division (the Russian computer hardware market has already contracted substantially, and we're expecting a 20-30% y-o-y reduction in RUB-denominated volume in 2009).

So far we've been unable to reach the company for comment.  The first two scenarios seem unlikely.  On the other hand, we've already seen a substantial drop in both advertising and IT expenditures by the financial, telecoms, and construction sectors.  We believe the larger than expected staff cuts are a result of a combination of the third and fourth scenarios.

In 2009 we expect drops in revenues will be concentrated in the group's low-profit hardware business.  With hardware margins already pressured and hardware revenues in freefall across the sector, layoffs are the only way for the division to remain in the black this year.

Conclusion

Assuming the bulk of the 20% staff reduction is concentrated in the group's hardware solutions division, we don't consider the news indicative of equity value erosion at Armada.  Though hardware sales generate nearly 50% of group revenues, the division's equity value contribution to overall group equity is already uninspiring.  Pending further details, we view the news as neutral for Armada's equity value.