bulgaria telecoms apr 2008

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IntelliNews Bulgarian Telecom and IT Sec tor

March 2008

e-ma il: [email protected]

Editorial: +359 (2) 816 04 04

Copying prohibited. Copyright 1999-2008 Internet Securities, Inc. ALL RIGHTS RESERVED

Bulgarian Telecom and IT Sector

Ma rch 2008


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IntelliNews Bulgarian Telecom and IT Sec tor

March 2008

e-ma il: [email protected]

Editorial: +359 (2) 816 04 04

Copying prohibited. Copyright 1999-2008 Internet Securities, Inc. ALL RIGHTS RESERVED

Contents

Executive Summary

Market Performance

Corporate Reports

IT and Broa dc asting

Output, Va lue Added

Statistics

2

3

5

6

8

Executive Summary

The telec om and IT sec tor co ntinued growing a t

steep rates in 2007 while consumer patterns

moved further in favour of wireless phone services

and internet. Official GDP breakdowns unveil

c ertain und erpe rformanc e on the ICT ma rket in

comparison with individual corporate reports but

this is largely based on methodological failures.

Quantitative indicators monitored by market

players look much more convincing about the

growth path and the countrys cell-phone usage

ha s a lrea dy mo ved to one of the highest levels in

Europe and significantly above the average forthe EU market -- 132.8% as of end -Dec em ber 2007

c om pared to 105.9% a yea r ea rlier. The gross

revenues of the three cell-phone operators

reached EUR 1.1bn in 2007 outpacing more than

tw o t imes the business of land line c om pe titors.

Despite the high growth rate on the wireless

telecom market, the prices remain quite high for

the EU sta nd ard s. The fo rthc om ing introd uc tion of

number portability and recently approved

regulatory restraints on fixed-to-wireless

interconnection fees are about to keep the high

grow th ra te 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 p robab ly significa ntly

underestimated in the official internet servicesta tistics.

Written by IntelliNews. The rep ort is b a sed on sources whic h we b elieve to b e relia b le, but no wa rra nty, either express or implied, is

provided in relation to the a c curac y or co mp leteness of the information. The views expressed are our be st judg ment a s of the d ate of

issue a nd are subjec t to c ha ng e w ithout no tice. Op inions are no t nec essa rily those o f ISI Emerging Ma rkets, Euromo ne y Institutiona l

Investor PLC o r its a ffilia tes. ISI Eme rging Ma rkets and Eurom on ey Institutiona l Investor PLC ta ke no resp on sibility for de c isions ma d e on the

b a sis of these op inions. Any red istrib ution of th is informa tion is strictly pro hib ited . Cop yrigh t 1999-2008 Inte rnet Sec urities, Inc ., a ll righ ts

reserved . A Euromo ne y Institutiona l Investor co mp a ny. Co p yrigh t 1998-2008 Warsa w, a ll rights reserved .


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IntelliNews Bulga rian Telec om and ITSec tor

Ma rc h 2008

e-m ail: [email protected] om

Ed itorial: +359 (2) 816 04 04

Copying prohib ited . Copyrigh t 1999-2008 Inte rnet Securities, Inc . ALL RIGHTS RESERVED 3

MARKET PERFORMANCEWireless telecom sector expands

leadership over landline competitors

Telecom revenues (EUR mn)

0

200

400

600

800

1000

1200

2002 2003 2004 2005 2006 2007

Wireless Landline (BTC )

Source: Company reports

The wireless telecom market grew by roughly 17% in nominal value terms to morethan EUR 1.1bn in 2007, according to the financial reports of the three cell-phoneoperators in the sector. In volume terms, the growth rate was even more impressive despitethe high-base reached in 2006. The cell-phone penetration rate thus advanced to one of the

highest levels in Europe in terms of active SIM cards per capita. The figure is estimated at

132.8% as of end-December compared to 105.9% a year earlier, according to datapresented by market leader MobilTel, member of Austrias mobilkom group. This is one

of the highest cell-phone usage ratios in Europe and it stands significantly above theaverage for all EU member states. In fact, the steepest market expansion is reported inminutes 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 profitmargins in the sector remain quite high, safe for the latest entrant vivatel, owned by thedominant landline telecom BTC. Vivatel is not able to reach the break-even point yet due

to its early phase of development but is the fastest growing competitor in sales terms. Thesecond biggest cell-phone operator Globul, owned by Greek Cosmote, has significantlyimproved its position over the past several years from a market share of 26% in terms of

SIM cards at the end of 2002 to roughly 40% as of end-2007. MobilTel and vivatel serviceabout 50% and 10% of the SIM cards, respectively. All three competitors have already

launched 3G services and are expanding towards various multimedia and internetapplications. MobilTel and GluBul are also promoting combined fixed-line and wirelesspackages of voice, internet and TV service that will challenge the business of landline

operators. The wireless telecom sector is already generating much bigger revenues thantraditional landline business. While the two market segments generated roughly equal salevalues in 2003, the wireless business surged to more than EUR 1.1bn in 2007 against someEUR 500mn for BTC, which controls more than 90% of the landline telecom sales in the

country.

Cell-phone usage surges to one of

highest ratios in EuropeSIM cards (mn, end of period)

0.

01

0.

02

0.0

5

0.

19

0.

45

1.

38

2.

2 6 3

.49 4

.6

66

.24

10

.14

8.

15

0.

004

0

2

4

6

8

10

12

1995

1996

1997

1998

1999

2000

*2001

2002

2003

2004

**2005

2006

2007

* 2001 - entry of second operator;

** 2005 - entry of third operator

Source: Company reports, IntelliNews

Market shares of cellphone operators, %

40

10

37

6

50

57

0

10

20

30

40

50

60

70

MobilTel GloBul v iv atel

SIM cards Revenues

Source: Company reports, IntelliNews

Valued added statistics underperform

corporate reports

Value added (constant price, % y/y)

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

1

10

100

1000

Y/Y, left scale

Cumuluative since 1997, logarithmic right scale

Source: NSI, preliminary data for 2007

The value added statistics for the telecom and IT sector, including postal services,once again showed much weaker performance than corporate reports suggested,

according to preliminary data of the national statistical institute (NSI) derived from the

GDP breakdown by supply components. The ICT sector increased by real 3.4% in 2007,according to the statistical institute, but it is quite likely to see significant revisions in thedata. The figures for 2006 are significantly revised to an annual drop of 1.6% from apreviously reported growth of 3.4%. We believe however that the statistical institutesignificantly underestimates the telecom and IT real indices due to reduced prices, mainly

in the wireless telecom sector, that are not properly covered in the deflators used forcalculating real valued added changes. This is evident from the very steep voice traffichikes reported by cell-phone operators that should have a much bigger impact on the ICT

business than the figures of the statistical institute indicate. Our view is also confirmed byvarious independent research firms estimating the ICT growth at about 20% in 2007nominal terms. Given that the average prices are mostly flat in the sector, and often

declining if quality factors are considered, the real growth is apparently much strongerthan the GDP breakdown shows.

The total value added in the ICT sector is estimated at BGN 2.2bn (EUR 1.2bn) in 2007 ongross 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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figures are calculated in current prices and should be more reliable than the real indicesdependent on price deflators.

Cell-phone operators sign number

portability rules 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-phonenumbers, including the three-digit prefix, after changing their providers. Eachoperator published amended terms and conditions of the service to take into account thenumber portability agreement. The rules should be enforced by mid-April at latest but thereal start of number transfers will most likely take place on Jul 1, 2008, when the threecell-phone operators have to activate a centralized database of customers in accordance

with the functional specifications approved by the state telecoms regulator. The centralizeddatabase has to provide a smooth transition of customers to new operators, regular reportson number transfers, and fair billing terms. The functional specifications impose customer

friendly terms for change of operators under conditions of a one-stop service administeredby the recipient company only and an optional one-off fee for the customer that is alsodecided 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. Thedonor operator may charge a cost-oriented fee to the recipient operator but the latter is notforced 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 ofunpaid bills or incorrect declarations on the side of the customer. The new operator is evenallowed 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 haveto contact the donor operator.

Wireless telecoms adjust marketing

strategies in search of long-term

contracts with customers

The start of the number portability service in the wireless telecom sector is expectedto step up further the competition among the three operators. The practice in other EUcountries 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 bythe 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 themarket, 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 aimedat attracting or retaining customers should increase. The importance of the numberportability 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 beginningof 2007 but MobilTel refused to sign the draft common rules claiming that they reflectedonly 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 infight for its dominant sales position. The European Commission has criticized the countryon the issue but sanctions are not imposed by now, as the missed deadline is violating only

national regulations.

Telecom regulator cuts prices of fixed-

to-wireless services by 10%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 willimpose another reduction of the price of the said service as of July 1, 2008. The telecomcommission 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. Wholesaleprices stand at BGN 0.381 and BGN 0.366 for high and low traffic respectively. The localcharges 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 localregulator to push for thinner profit margins in the sector.


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CORPORATE REPORTS MobilTel boosts sales to EUR 643mn

in 2007The countrys leading cell-phone operator MobilTel increased its revenues by 10.6%y/y to EUR 167.6mn in Q4 and 10.1% y/y to EUR 642.7mn last year, according to thefinancial report of MobilTels sole owner Telekom Austria. The profit margin of thecompany 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 threemonths 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 earlierreported, the active SIM cards serviced by MobilTel increased by 19.5% last year to 5.2mnat 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 threecell-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 Mtel)

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

53mn in 2007The net profit of the countrys second largest cell-phone operator GloBul, owned bythe 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 roseby 20.4% to BGN 806mn paced by voice traffic receipts from contract users. The averagerevenue per user flattened at its last years level of EUR 10 per month despite the 37%

increase of the overall duration of phone calls to 97 minutes. The number of active SIMcards 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, accordingto companys 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 countrys major landline telecom BTC , which

includes also the wireless arm BTC Mobile (traded as vivatel), dropped 15.6% toBGN 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 thetelecom 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 1-2years 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 AIGCapital Partners, NEF Telecom, submitted a buyout offer to minority shareholders in BTCon 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 withinsignificant trade volumes.

Following changes in phone usage patterns, the management of BTC announced inMarch 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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development of its wireless arm vivatel and improving its internet infrastructure. As thenumber 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 ofservices to increase revenues. BTC would launch hosting, outsourcing and management ofservices 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. Thenumber 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 netconsolidated profit of BTC dropped 15.6% to BGN 111.6mn (EUR 57.1mn) last yearwhile total sales rose by 2.3% to BGN 1.03bn. BTC raise capital expenditures last year by41.9% to BGN 716.7mn. The shareholders of BTC will vote on April 14 to distribute EUR

235mn as dividends.

BTC reports 73% digitalisation rate of

landline telecom gridBTC 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 countrys legislative arrangements with the EU. The

company has invested BGN 130mn (EUR 66.5mn) in modernisation of the landlinenetwork. The project for network digitalisation started in the beginning of 2006. BTCoffers broadband internet in 300 settlements in the country at present. It plans to invest

additional BGN 25mn in digitalisation to expand internet services.

Alternative telecom Max Telecom maygo public

The CEO of the alternative telecom operator Max Telecom, Krasimir Stoichev,informed that the company plans to launch shares on the local stock exchange . MaxTelecom would seek EUR 10mn to EUR 12mn from the bourse to finance its investmentprogramme. The company has invested a total of EUR 15mn in the WiMAX (Worldwide

Interoperability for Microwave Access) network development and plans to invest at leastthe same amount this year. Max Telecom launched its WiMAX network in Octoberproviding its services to more than 30% of countrys 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 toconstruct WiMAX networks BTC, Cosmo Bulgaria Mobile (operating the second largest

wireless grid GloBul), Trans Telecom, Nexcom and Carrier BG.

IT, BROADCASTING Internet usage grows but statisticsdiffer significantly among researchers

A survey of the statistical office estimates that about 19% of all households usedinternet 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 ascompared to a year earlier. The number of households, which have personal computersincreased 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% inoffice) and 70.3% used cellular phone. Only 7.6% of all internet users purchased goods orservices 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 internetconnections used e-government services.

Internet penetration to households increased by 5pps to 36% in H2 2007 as comparedto 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 insighton the market than the figures of the statistical institute. Internet was used for search ofinformation 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 TVpenetration has declined to 72% at the end of the year against 75% at the beginning. Theusage 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 ascompared to 17% in 2006 and 9.6% in 2004.

Cable operator CableTel completes

several acquisitionsThe state antitrust commission has approved several acquisitions of the country'slargest 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 cableTV market in Macedonia and is about to launch operations in Serbia and Albania by the


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end of the year.

The ownership of CableTel is also undergoing transformations, as Wild Mountain Holdingof Netherlands has approached the state antitrust commission for taking over indirectcontrol 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 investmentcompany Ramford Alliance acquired the full stakes in CableTel and Vikom in February2007.

Antitrust commission approves

expansion of cable operator EurocomThe state antitrust commission has allowed one of the main cable TV and internet

operators in the country Eurocom to acquire two smaller operators OSG Intercomand Intercom Bor Sat, a note on the site of the commission informs. The target operators

are active only in the countrys second largest city of Plovdiv and hold small internetshares as well. Intercom Bor Sat holds on its part 50% of Eurocom Chirpan. Theconcentration 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 themarket is effective with easy to pass barriers. Therefore the deal is not expected to lead tomarket 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 isfully owned by the US investment fund Warburg Pincus, hopes to expand its market share

to 12.5%.

IBM expands local service centre to

200 employeesThe regional service centre of IMB in Sofia has expanded its staff to about 200

employees providing online support to customers in Central and Eastern Europe,Middle East, and Africa. The management unveiled that 10% of the local personnelcomprise 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 openthis month a technological and research centre to the countrys biggest university StKliment Ohridksi.


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APPENDIX:

OUTPUT AND VALUE ADDED IN COMMUNICATIONS INDUSTRIES

Aggregated telecom statistics as reported in GDP (BGN thousands)

Gross output,current price

Gross output realchange, y/y

Gross value added,current price

Value added realchange, 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

bulgaria telecoms apr 2008

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