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Bulgarian Telecom and IT Sector

March 2008

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Contents Executive Summary

Executive Summary 2 The telecom and IT sector continued growing at

steep rates in 2007 while consumer patterns
Market Performance 3 moved further in favour of wireless phone services
and internet. Official GDP breakdowns unveil
Corporate Reports 5 certain underperformance on the ICT market in
comparison with individual corporate reports but
IT and Broadcasting 6
this is largely based on methodological failures.
Output, Value Added 8 Quantitative indicators monitored by market
players look much more convincing about the
Statistics
growth path and the country’s cell-phone usage
has already moved to one of the highest levels in
Europe and significantly above the average for
the EU market -- 132.8% as of end-December 2007
compared to 105.9% a year earlier. The gross
revenues of the three cell-phone operators
reached EUR 1.1bn in 2007 outpacing more than
two times the business of landline competitors.
Despite the high growth rate on the wireless
telecom market, the prices remain quite high for
the EU standards. The forthcoming introduction of
number portability and recently approved
regulatory restraints on fixed-to-wireless
interconnection fees are about to keep the high
growth rate in terms of voice traffic albeit at
slightly narrower profit margins. Alternative
landline operators are also expected to play a
bigger role as they hold only about 5% of the
telecom market at present. However, the role of
alternative telecoms and other cable operators
(LAN, cable TV) is probably significantly
underestimated in the official internet service
statistics.

Written by IntelliNews. The report is based on sources which we believe to be reliable, but no warranty, either express or implied, is
provided in relation to the accuracy or completeness of the information. The views expressed are our best judgment as of the date of
issue and are subject to change without notice. Opinions are not necessarily those of ISI Emerging Markets, Euromoney Institutional
Investor PLC or its affiliates. ISI Emerging Markets and Euromoney Institutional Investor PLC take no responsibility for decisions made on the
basis of these opinions. Any redistribution of this information is strictly prohibited. Copyright © 1999-2008 Internet Securities, Inc., all rights
reserved. A Euromoney Institutional Investor company. Copyright © 1998-2008 Warsaw, all rights reserved.

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MARKET PERFORMANCE
Wireless telecom sector expands The wireless telecom market grew by roughly 17% in nominal value terms to more
leadership over landline competitors than EUR 1.1bn in 2007, according to the financial reports of the three cell-phone
operators in the sector. In volume terms, the growth rate was even more impressive despite
the high-base reached in 2006. The cell-phone penetration rate thus advanced to one of the
Telecom revenues (EUR mn) highest levels in Europe in terms of active SIM cards per capita. The figure is estimated at
1200 132.8% as of end-December compared to 105.9% a year earlier, according to data
presented by market leader MobilTel, member of Austria’s mobilkom group. This is one
1000
of the highest cell-phone usage ratios in Europe and it stands significantly above the
800 average for all EU member states. In fact, the steepest market expansion is reported in
600 minutes of voice traffic, as all operators have reduced the average price charges in fight for
bigger market shares. There is still a big potential for price cuts given that the profit
400
margins in the sector remain quite high, safe for the latest entrant vivatel, owned by the
200 dominant landline telecom BTC. Vivatel is not able to reach the break-even point yet due
0 to its early phase of development but is the fastest growing competitor in sales terms. The
2002 2003 2004 2005 2006 2007 second biggest cell-phone operator Globul, owned by Greek Cosmote, has significantly
improved its position over the past several years from a market share of 26% in terms of
Wireless Landline (BTC)
SIM cards at the end of 2002 to roughly 40% as of end-2007. MobilTel and vivatel service
Source: Company reports about 50% and 10% of the SIM cards, respectively. All three competitors have already
launched 3G services and are expanding towards various multimedia and internet
applications. MobilTel and GluBul are also promoting combined fixed-line and wireless
packages of voice, internet and TV service that will challenge the business of landline
operators. The wireless telecom sector is already generating much bigger revenues than
traditional landline business. While the two market segments generated roughly equal sale
values in 2003, the wireless business surged to more than EUR 1.1bn in 2007 against some
EUR 500mn for BTC, which controls more than 90% of the landline telecom sales in the
country.
Cell-phone usage surges to one of SIM cards (mn, end of period) Market shares of cellphone operators, %
highest ratios in Europe
10.14

12 70
10 60 57
8.15

50
8
6.24

50
40
37
4.66

6 40
3.49

4
2.26

30
1.38
0.004

0.45

2
0.19

20
0.05
0.01
0.02

10
0 6
10
1995
1996
1997
1998
1999
2000
*2001
2002
2003
2004
**2005
2006
2007

0
MobilTel GloBul v iv atel
* 2001 - entry of second operator;
** 2005 - entry of third operator SIM cards Rev enues

Source: Company reports, IntelliNews Source: Company reports, IntelliNews

Valued added statistics underperform The value added statistics for the telecom and IT sector, including postal services,
corporate reports once again showed much weaker performance than corporate reports suggested,
according to preliminary data of the national statistical institute (NSI) derived from the
Value added (constant price, % y/y) GDP breakdown by supply components. The ICT sector increased by real 3.4% in 2007,
100.0 1000
according to the statistical institute, but it is quite likely to see significant revisions in the
data. The figures for 2006 are significantly revised to an annual drop of 1.6% from a
80.0 previously reported growth of 3.4%. We believe however that the statistical institute
60.0 100 significantly underestimates the telecom and IT real indices due to reduced prices, mainly
40.0
in the wireless telecom sector, that are not properly covered in the deflators used for
calculating real valued added changes. This is evident from the very steep voice traffic
20.0 10
hikes reported by cell-phone operators that should have a much bigger impact on the ICT
0.0 business than the figures of the statistical institute indicate. Our view is also confirmed by
-20.0 1 various independent research firms estimating the ICT growth at about 20% in 2007
nominal terms. Given that the average prices are mostly flat in the sector, and often
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

Y/Y, left scale
Cumuluativ e since 1997, logarithmic right scale
Source: NSI, preliminary data for 2007
declining if quality factors are considered, the real growth is apparently much stronger
than the GDP breakdown shows.
The total value added in the ICT sector is estimated at BGN 2.2bn (EUR 1.2bn) in 2007 on
gross sales of BGN 4.1bn. The share of the ICT sector, including media and postal
services, accounted for 4.8% of the economy in 2007 gross value added terms. These

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IntelliNews Bulgarian Telecom and IT Sector
March 2008
Cell-phone operators sign number
portability rules
Wireless telecoms adjust marketing
strategies in search of long-term
contracts with customers
Telecom regulator cuts prices of fixed-
to-wireless services by 10%
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figures are calculated in current prices and should be more reliable than the real indices
dependent on price deflators.
The three wireless telecom operators in the country signed on Feb 25, 2008, the long-
debated number portability rulebook that will allow customers to keep cell-phone
numbers, including the three-digit prefix, after changing their providers. Each
operator published amended terms and conditions of the service to take into account the
number portability agreement. The rules should be enforced by mid-April at latest but the
real start of number transfers will most likely take place on Jul 1, 2008, when the three
cell-phone operators have to activate a centralized database of customers in accordance
with the functional specifications approved by the state telecoms regulator. The centralized
database has to provide a smooth transition of customers to new operators, regular reports
on number transfers, and fair billing terms. The functional specifications impose customer
friendly terms for change of operators under conditions of a one-stop service administered
by the recipient company only and an optional one-off fee for the customer that is also
decided by the recipient company. As far as it is in the interest of the recipient operator to
attract a new customer, the fee for transfer of numbers will be either zero or very low. The
donor operator may charge a cost-oriented fee to the recipient operator but the latter is not
forced to transfer the bill to the customer. All transfers should be completed within a 10-
day period and refusals by the donor company are accepted only in exceptional cases of
unpaid bills or incorrect declarations on the side of the customer. The new operator is even
allowed to cover outstanding claims and costs billed during the transfer window so that the
customer will have full access to telecom services in the transition period and will not have
to contact the donor operator.
The start of the number portability service in the wireless telecom sector is expected
to step up further the competition among the three operators. The practice in other EU
countries shows that the share of number transfers is quite significant when the cost of the
service is low and the rules are drafted in favour of the customers. The conditions set by
the functional specifications are fully supporting this model and the market players,
especially the third cell-phone operator vivatel, are likely to start a very aggressive
campaign for attracting customers of competitors. Given the high penetration rate on the
market, the cell-phone operators will certainly have to adjust their market strategies to the
new threats and opportunities arising from the number portability agreement. The overall
quality and price terms for customers should improve and the role of club benefits aimed
at attracting or retaining customers should increase. The importance of the number
portability is also indicated by the long negotiations held before the final agreement. The
three cell-phone operators were expected to introduce number transfers as of the beginning
of 2007 but MobilTel refused to sign the draft common rules claiming that they reflected
only the interests of the other two competitors GloBul and vivatel. On the other hand,
GloBul and vivatel claimed that the market leader was deliberately slowing the process in
fight for its dominant sales position. The European Commission has criticized the country
on the issue but sanctions are not imposed by now, as the missed deadline is violating only
national regulations.
Downward price movements in the telecom sector are also expected from regulatory
interventions, as the state telecom commission reduced inter-company charges on
fixed-to-wireless connections by an average of about 10% (BGN 0.03/EUR 0.015) --
8.14% for high traffic and 11.2% for low traffic -- as of Feb 1, 2008. The regulator will
impose another reduction of the price of the said service as of July 1, 2008. The telecom
commission also plans to decrease the price of the phone calls from fixed to wireless
devices by 34.38% (high usage) and 48.09% (low usage) by the end of 2009. Wholesale
prices stand at BGN 0.381 and BGN 0.366 for high and low traffic respectively. The local
charges of fixed to wireless phone service are seen as the highest among EU members in
the recent estimates of the European Commission that puts more pressure on the local
regulator to push for thinner profit margins in the sector.
4
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CORPORATE REPORTS
MobilTel boosts sales to EUR 643mn The country’s leading cell-phone operator MobilTel increased its revenues by 10.6%
in 2007 y/y to EUR 167.6mn in Q4 and 10.1% y/y to EUR 642.7mn last year, according to the
financial report of MobilTel’s sole owner Telekom Austria. The profit margin of the
company calculated before interest, taxes, depreciation and amortisation widened by 5% to
EUR 357.1mn for the whole year. The monthly revenue per user dropped to EUR 10.4
(EUR 20.9 for contract customers and EUR 3.1 for prepaid cards) during the last three
months of 2007 as compared to EUR 10.8 a year earlier (23.4 and 3.7). The lower prices
offered by the operator were compensated by longer call duration per user. As earlier
reported, the active SIM cards serviced by MobilTel increased by 19.5% last year to 5.2mn
at end-December. The share of contract users widened to 42.1% last year as compared to
36.8% in 2006. The strong competition reduced the market share of MobilTel to 50.3%
last year as compared to 52.5% in 2006. The number of SIM cards serviced by the three
cell-phone operators in the country surged to 132.8% of the population at end-December
from 105.9% a year earlier, according to estimates of MobilTel.
MobilTel (traded as M’tel)
2002 2003 2004 2005 2006 2007
Revenues (EUR mn) 384 432 486 528 583.8 642.7
Growth, y/y 15.6% 12.5% 12.5% 8.7% 10.6% 10.1%
EBITDA (EUR mn) 221 272 306 325 340.2 357.1
Net income (EUR mn) 144 184 203 190 - -
Subscriptions (SIM cards, ‘000) 1,672 2,425 3,035 3,594 4,268 5,099
Market Share by SIM cards 74.0% 69.4% 65.1% 57.6% 52.5% 50.3%
Source: MobilTel, Telekom Austria, mobilkom austria group
Net profit of Globul surges to EUR The net profit of the country’s second largest cell-phone operator GloBul, owned by
53mn in 2007 the Greek Cosmote, increased by 63.9% y/y to BGN 104mn (EUR 53.2mn) last year,
according to the financial report of the parent company. The revenues of the company rose
by 20.4% to BGN 806mn paced by voice traffic receipts from contract users. The average
revenue per user flattened at its last year’s level of EUR 10 per month despite the 37%
increase of the overall duration of phone calls to 97 minutes. The number of active SIM
cards serviced by GloBul increased by 18.4% y/y to 3.87mn at the end of December
covering roughly 40% of the market serviced by the three cell-phone operators, according
to company’s estimates. Contract users increased by 46% y/y to 43.1% of all customers.
Cosmo Bulgaria Mobile (traded as GloBul)
2002 2003 2004 2005 2006 2007
Revenues (EUR mn) 80 124 186 274 342 412
EBITDA (EUR mn) -16 1 21 94 126 162
Net profit (EUR mn) -33 -22 -8 26 32.4 53.2
Subscriptions (SIM cards, ‘000) 587 1,069 1,624 2,394 3,271 3,873
Market Share by SIM cards 26.0% 30.6% 34.9% 38.5% 40% 40%
Source: Cosmo Bulgaria Mobile, ISI Emerging Markets database

Net consolidated profit of BTC drops
15.6% to EUR 57.6mn last year;
wireless arm vivatel remains on red
The net consolidated profit of the country’s major landline telecom BTC, which
includes also the wireless arm BTC Mobile (traded as vivatel), dropped 15.6% to
BGN 111.6mn (EUR 57.6mn) in 2007 but the rate of narrowing improved as compared to
Jan-Sep when the indicator decreased by 28.9% in a year. The consolidated sales of the
telecom increased by 2.3% to BGN 1.03bn in 2007 – BGN 885mn from wireline services
(including internet) and BGN 137mn from wireless services. The net income of BTC
Mobile remained on red but its financials are expected to improve significantly in 1-2
years when sales are likely to overcome expenses linked to its early phase of development.
AIG Capital Partners completed the acquisition of 90% of BTC in block deals on the local
stock exchange for a total of BGN 2.77bn in August 2007. The local subsidiary of AIG
Capital Partners, NEF Telecom, submitted a buyout offer to minority shareholders in BTC
on plans to withdraw the stocks from the bourse but managed to expand its share by only
3.9 percentage points and the company remained on the stock exchange although with
insignificant trade volumes.
Following changes in phone usage patterns, the management of BTC announced in
March 2008 that the group will prioritise wireless and internet services. BTC will thus
invest 20% of its projected revenues from fixed and wireless services or EUR 110mn in

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IntelliNews Bulgarian Telecom and IT Sector
March 2008
BTC reports 73% digitalisation rate of
landline telecom grid
Alternative telecom Max Telecom may
go public
IT, BROADCASTING
Internet usage grows but statistics
differ significantly among researchers
Cable operator CableTel completes
several acquisitions
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development of its wireless arm vivatel and improving its internet infrastructure. As the
number of customers of fixed services has decreased in the last two years to 2.2mn, which
corresponds to 95% of the line market, the telecom will start offering a wider range of
services to increase revenues. BTC would launch hosting, outsourcing and management of
services to compete with IT companies. The customers base of vivatel stands at 1.1mn as
of mid-March, corresponding to a market share of 12% in the estimates of BTC. The
number of ADSL internet users of BTC has doubled to 2mn in a year. The Group expects
the same growth this year, as vivatel will launch number portability as of April 14. The net
consolidated profit of BTC dropped 15.6% to BGN 111.6mn (EUR 57.1mn) last year
while total sales rose by 2.3% to BGN 1.03bn. BTC raise capital expenditures last year by
41.9% to BGN 716.7mn. The shareholders of BTC will vote on April 14 to distribute EUR
235mn as dividends.
BTC secured digital telephone services to 94 settlements in the country at the end of
2007, which corresponds to a digitalisation ratio of more than 73% at national level
against 60% set as a target in the country’s legislative arrangements with the EU. The
company has invested BGN 130mn (EUR 66.5mn) in modernisation of the landline
network. The project for network digitalisation started in the beginning of 2006. BTC
offers broadband internet in 300 settlements in the country at present. It plans to invest
additional BGN 25mn in digitalisation to expand internet services.
The CEO of the alternative telecom operator Max Telecom, Krasimir Stoichev,
informed that the company plans to launch shares on the local stock exchange. Max
Telecom would seek EUR 10mn to EUR 12mn from the bourse to finance its investment
programme. The company has invested a total of EUR 15mn in the WiMAX (Worldwide
Interoperability for Microwave Access) network development and plans to invest at least
the same amount this year. Max Telecom launched its WiMAX network in October
providing its services to more than 30% of country’s total population at present. It plans to
cover 90% of the population by the middle of this year. The company holds a point-to-
multi-point licence granted in November 2005. Five other companies are also licensed to
construct WiMAX networks – BTC, Cosmo Bulgaria Mobile (operating the second largest
wireless grid GloBul), Trans Telecom, Nexcom and Carrier BG.
A survey of the statistical office estimates that about 19% of all households used
internet services last year as compared to 17% in 2006 and 9.6% in 2004. More than
80% of all users relied on broadband connections last year, which is by 20pps more as
compared to a year earlier. The number of households, which have personal computers
increased to 23.3% against 21.3% in 2006 and 15% in 2004. In the age group 16 to 74,
34.5% of the respondents used personal computers (74.5% of them at home and 42% in
office) and 70.3% used cellular phone. Only 7.6% of all internet users purchased goods or
services online. The enterprise survey shows that the number of companies with internet
connections rose by 14.5pps to 88.1% last year. About 60% of the companies with internet
connections used e-government services.
Internet penetration to households increased by 5pps to 36% in H2 2007 as compared
to 31% in H1, according to data of the local research agency Synovate Bulgaria. The
survey covers a broader range of internet providers and probably provides a better insight
on the market than the figures of the statistical institute. Internet was used for search of
information and reading news mainly while music and movies downloading steps back.
The share of households, which possess personal computer, has risen to 39% in the second
half of the year as compared to 36.5% in the first half. At the same time cable TV
penetration has declined to 72% at the end of the year against 75% at the beginning. The
usage of landline phone lines also declines. The recently published survey of the statistical
office estimates that about 19% of all households used internet services last year as
compared to 17% in 2006 and 9.6% in 2004.
The state antitrust commission has approved several acquisitions of the country's
largest cable TV provider CableTel. The cumulative investments of CableTel in the
country are estimated at EUR 150mn by end-2007 and are directed to cable TV, broadband
internet and fixed telephone services to almost 1mn households in 23 settlements.
CableTel controls about 25% of the local cable TV market. It is presented in neighbouring
countries as well and plans to build a Balkan optical ring. CableTel holds 60% of the cable
TV market in Macedonia and is about to launch operations in Serbia and Albania by the
6
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March 2008 Editorial: +359 (2) 816 04 04

end of the year.

The ownership of CableTel is also undergoing transformations, as Wild Mountain Holding
of Netherlands has approached the state antitrust commission for taking over indirect
control of the local operators and the smaller Vikom Bulgaria specialised in radio and TV
services. The concentration is expected to affect four relevant markets: cable television,
internet services, and voice transfers by own and rented landlines. The UK investment
company Ramford Alliance acquired the full stakes in CableTel and Vikom in February
2007.
Antitrust commission approves The state antitrust commission has allowed one of the main cable TV and internet
expansion of cable operator Eurocom operators in the country Eurocom to acquire two smaller operators OSG Intercom
and Intercom Bor Sat, a note on the site of the commission informs. The target operators
are active only in the country’s second largest city of Plovdiv and hold small internet
shares as well. Intercom Bor Sat holds on its part 50% of Eurocom Chirpan. The
concentration is part of the development strategy of Eurocom and is expected to affect the
cable TV market and the internet market. The regulator states that the competition on the
market is effective with easy to pass barriers. Therefore the deal is not expected to lead to
market dominance. Eurocom has taken over several cable providers since last year and
acquired also the local satellite TV provider ITV Partners in January. Eurocom, which is
fully owned by the US investment fund Warburg Pincus, hopes to expand its market share
to 12.5%.
IBM expands local service centre to The regional service centre of IMB in Sofia has expanded its staff to about 200
200 employees employees providing online support to customers in Central and Eastern Europe,
Middle East, and Africa. The management unveiled that 10% of the local personnel
comprise former Bulgarian emigrants with expertise in the IT sector or nationals of
developed countries such as Ireland, France, and Germany. IBM is also expected to open
this month a technological and research centre to the country’s biggest university St
Kliment Ohridksi.

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IntelliNews Bulgarian Telecom and IT Sector e-mail: intellinews@securities.com
March 2008 Editorial: +359 (2) 816 04 04

APPENDIX:

OUTPUT AND VALUE ADDED IN COMMUNICATIONS INDUSTRIES

Aggregated telecom statistics as reported in GDP (BGN thousands)
Gross output, Gross output real Gross value added, Value added real
current price change, y/y current price change, y/y
1997 531,591 0.8% 340,634 5.5%
1998 833,154 28.0% 506,488 17.9%
1999 1,341,642 39.9% 801,078 30.3%
2000 1,826,945 26.1% 1,060,582 21.9%
2001 2,496,874 22.3% 1,432,549 21.4%
Q1/2002 781,011 21.8% 504,888 25.1%
Q2/2002 755,771 17.8% 432,129 16.7%
Q3/2002 847,255 19.2% 468,963 19.3%
Q4/2002 729,969 11.8% 388,430 12.6%
2002 3,114,006 17.6% 1,794, 410 18.5%
Q1/2003 813,320 8.3% 515,545 9.4%
Q2/2003 836,326 10.3% 472,541 8.9%
Q3/2003 930,253 8.2% 508,374 7.4%
Q4/2003 810,202 9.3% 436,840 8.5%
2003 3,390,101 9.0% 1,933,300 8.5%
Q1/2004 856,691 4.7% 538,688 3.3%
Q2/2004 938,878 5.3% 534,685 4.1%
Q3/2004 1,091,915 6.0% 606,325 4.9%
Q4/2004 934,518 6.4% 484,704 2.1%
2004 3,822,002 5.6% 2,164,402 3.7%
Q1/2005 863,696 -0.7% 531,692 -0.6%
Q2/2005 938,609 2.8% 529,060 3.6%
Q3/2005 1,082,727 0.5% 611,334 3.2%
Q4/2005 936,948 1.0% 497,329 4.6%
2005 3,821,980 0.9% 2,169,415 2.7%
Q1/2006 872,723 -0.8% 528,436 -2.0%
Q2/2006 976,070 0.2% 534,872 -1.5%
Q3/2006 1,101,427 0.9% 596,433 -0.5%
Q4/2006 970,654 -0.3% 492,456 -2.6%
2006 3,920,874 0.0% 2,152,072 -1.6%
Q1/2007 874,508 -3.1% 525,297 -3.2%
Q2/2007 1,014,587 3.9% 549,781 5.1%
Q3/2007 1,184,007 5.3% 639,494 5.3%
Q4/2007 1,001,099 6.3% 493,766 6.4%
2007 4,074,201 3.3% 2,208,338 3.4%
Source: National Statistical Institute (data reported in GDP breakdown by sectors)
*Preliminary data for 2007; Revised data for 2002-2006

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