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... Page 21 Israel Information Technology Report Q4 2015 Absence Of 2015 Budget To Create Two Years Of Volatility Israel - Government Final Consumption, Real Growth % chg y-o-y 2018f 2017f 2016f 2015f... Business Monitor International Ltd Page 27 Israel Information Technology Report Q4 2015 IT Spending Per Capita (USD) 2015f 1,000 750 500 250 2015f Bahrain Israel United Arab Emirates South Africa... the Israeli Ministry of Defense and Israeli Police, and from utilities leader Israel Electric Company © Business Monitor International Ltd Page 36 Israel Information Technology Report Q4 2015
Q4 2015 www.bmiresearch.com ISRAEL INFORMATION TECHNOLOGY REPORT INCLUDES 5-YEAR FORECASTS TO 2019 ISSN 1752-4245 Published by:BMI Research Israel Information Technology Report Q4 2015 INCLUDES 5-YEAR FORECASTS TO 2019 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: July 2015 BMI Research Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@bmiresearch.com Web: http://www.bmiresearch.com © 2015 Business Monitor International Ltd All rights reserved. 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Israel Information Technology Report Q4 2015 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................... 9 IT ........................................................................................................................................................... 9 Political ................................................................................................................................................. 11 Economic ............................................................................................................................................... 12 Operational Risk ..................................................................................................................................... 13 Industry Forecast .............................................................................................................. 15 Table: IT Industry - Historical Data And Forecasts (Israel 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Macroeconomic Forecasts ............................................................................................... 20 Economic Analysis ................................................................................................................................... 20 Expenditure Breakdown .......................................................................................................................... 21 Table: Economic Activity (Israel 2010-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Industry Risk Reward Index ............................................................................................. 26 Middle East And Africa Risk/Reward Index .................................................................................................. 26 Table: MEA IT Risk/Reward Index - Q415 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Market Overview ............................................................................................................... 30 Hardware ............................................................................................................................................. Software ............................................................................................................................................... Cloud Computing ................................................................................................................................... Services ................................................................................................................................................ 30 36 43 45 Industry Trends And Developments ................................................................................ 48 Regulatory Development .................................................................................................. 54 Table: IT Regulatory Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Table: Government Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Competitive Landscape .................................................................................................... 56 International Companies ......................................................................................................................... 56 Table: Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Local Companies ................................................................................................................................... 57 Table: Amdocs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Table: Check Point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Table: Imperva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Table: Mellanox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Regional Overview ............................................................................................................ 61 Middle East And Africa ............................................................................................................................. 61 © Business Monitor International Ltd Page 4 Israel Information Technology Report Q4 2015 Demographic Forecast ..................................................................................................... 64 Table: Population Headline Indicators (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Table: Key Population Ratios (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Table: Urban/Rural Population & Life Expectancy (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Table: Population By Age Group (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Table: Population By Age Group % (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Methodology ...................................................................................................................... 69 Industry Forecast Methodology ................................................................................................................ 69 Sources ................................................................................................................................................ 70 Risk/Reward Index Methodology ............................................................................................................... 71 Table: It Risk/Reward Index Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Table: Weighting Of Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 © Business Monitor International Ltd Page 5 Israel Information Technology Report Q4 2015 BMI Industry View BMI View: We revised our estimate for Israel's IT market size in 2014 in the Q415 update, in addition to making a small downward revision to the growth outlook. The new forecast better reflects the maturity of the Israeli IT market, including a greater share for IT services spending and the reduced growth prospects offered by Israel's mature IT hardware market. Growth rates will underperform emerging markets in the Middle East 2015-2019, but Israel will continue to be a lucrative market in per capita spending terms. Israel also sits at the technological frontier with a vibrant ICT start-up community and highly skilled tech workers, which have continued to attract high levels of investment in 2015 following a record-breaking year in 2014. We expect this trend to continue, as global IT firms look to leverage innovative solutions emerging from Israel's start-up ecosystem to accelerate their transition towards high-growth software and services such as cloud computing and big data analytics. Headline Expenditure Projections ■ Computer Hardware Sales: Forecast to reach ILS6.3bn in 2015, up from ILS6.2bn in 2014. Spending forecast to grow in local currency terms, but contract by 6% in US dollar terms due to depreciation as a result of deferred purchases and substitution for cheaper devices in the retail market. ■ Software Sales: ILS5.9bn in 2015, up from ILS5.5bn in 2014. Enterprise software spending will be the main growth driver as device and data proliferation will result in increased spending on customer relationship management, databases and business intelligence. ■ IT Services Sales: We expect IT services sales will continue to outperform the rest of the IT market, reaching ILS10.8bn in 2015, up from ILS10.1bn in 2014. Cloud computing adoption gaining momentum, while cybersecurity services are expected to outperform, with stable sectors such as government and defence that will continue to account for the majority of spending. © Business Monitor International Ltd Page 7 Israel Information Technology Report Q4 2015 Hardware Spending To Underperform In 2015 Due To Depreciation IT Market Spending By Segment Forecast 10 5 0 -5 -10 2013 2014e 2015f 2016f 2017f 2018f 2019f Israel - Computer hardware sales, ILSmn, % y-o-y Israel - Software sales, ILSmn, % y-o-y Israel - Services sales, ILSmn, % y-o-y e/f = BMI estimate/forecast. Source: BMI © Business Monitor International Ltd Page 8 Israel Information Technology Report Q4 2015 SWOT IT SWOT Strengths ■ Home to the most well developed economy and IT market in the region with major local IT companies based in the country, a highly educated, linguistically skilled workforce, and relatively low labour costs compared with developed markets. ■ Strong defence and government spending provides base for IT demand. ■ Strong political support, with the government having implemented many policies to aid in the expansion of the IT sector. ■ Investment in fibre-to-the-home and wireless data networks provide basis for cloud computing growth and internet of things expansion. Weaknesses ■ The recession at the beginning of the 2000s focussed customers on the bottom line, with enhanced services and customer market power adding to pressure on pricing and margins. ■ High penetration of computer devices limits growth opportunities mostly to new products and replacement sales. Opportunities ■ Cybersecurity threats should attract increased spending on safeguards as the concerns of government and enterprises escalate. ■ Growing demand for tablets and other mobile computing devices such as hybrids notebooks. ■ Defence and government projects should be less sensitive to fiscal retrenchment, with a major data centre project under way for the Israel Defense Forces. ■ Outsourcing, software-as-a-service and applications management likely to grow fastest out of IT services, with particular opportunities in the financial sector. ■ Opportunities for partnership/investment in Israel's lively local IT company sector. © Business Monitor International Ltd Page 9 Israel Information Technology Report Q4 2015 SWOT - Continued Threats ■ Government austerity measures will dampen consumer and business spending. ■ Shekel depreciation forecast for 2015 will erode Israeli purchasing power in global markets and result in some deferred purchases and substitution for cheaper models. ■ Intensifying regional tensions could increase operational risk. ■ Limited size of workforce could curb attractiveness as an research and development hub over the longer term. © Business Monitor International Ltd Page 10 Israel Information Technology Report Q4 2015 Political SWOT Analysis Strengths ■ Despite corruption allegations against some officials and members of parliament, government members are still some of the most accountable in the region. ■ Elections are for the most part free and transparent, ensuring that a broad spectrum of political views is represented within government. ■ Israeli defence forces (IDF) are amongst the strongest in the region, thus shielding the country from most spillovers from the Syrian crisis. Weaknesses ■ The protracted conflict with the Palestinians means there are persistent security risks. Strategies to minimise or end the conflict are domestically divisive, with tensions between Israel and Hamas set to remain elevated. ■ Frequent change to the composition of the coalition government often leads to policies becoming fragmented or significantly diluted. ■ With the civil war in Syria continuing, risks of a spill over in the form of terrorist attacks into Israel are ever-present. Opportunities ■ A warming of relations with Greece has given Israel the ability to engage in military exercises over a larger geographic area. Threats ■ Finding a lasting solution with the Palestinians continues to pose a dilemma for Israel, and we think a final agreement will remain elusive. Risks of a radicalisation in the West Bank are thus prominent. ■ Continued home-building in some West Bank settlements antagonises the Palestinians and stands in the way of the peace process. ■ The ultra-Orthodox parties' push to roll back on some socially-divisive reforms implemented in the past few years could increase social and political domestic instability. © Business Monitor International Ltd Page 11 Israel Information Technology Report Q4 2015 Economic SWOT Analysis Strengths ■ The workforce is highly educated and skilled, which will continue to attract investment in the IT and pharmaceutical sectors. ■ The country's close ties with the US provide it with substantial financial assistance for economic and military ends. Weaknesses ■ A sharp deterioration in the security situation can have an immediate impact on domestic confidence, tourism receipts, the exchange rate and foreign investment. ■ The economy is highly exposed to that of the US and Europe in terms of exports and investment. Opportunities ■ In the next five years, relatively elevated levels of employment will underpin robust private consumption growth. ■ Israel produces more technology start-up companies than any other country in the world except the US. ■ The gradual coming onstream of Israeli offshore gas fields will bring an influx in foreign investment, push up exports and is expected to serve the country's energy needs for decades. Threats ■ Competition from emerging Chinese and Indian producers of high-tech goods and polished diamonds could undermine demand for Israeli exports. ■ The ultra-Orthodox population's pattern of attaining education inadequate with labour market requirements is marginalising an increasing share of the labour force, and this trend could slow down long-term productivity growth. © Business Monitor International Ltd Page 12 Israel Information Technology Report Q4 2015 Operational Risk SWOT Analysis Strengths ■ The good standard of education contributes to a highly skilled labour force. ■ Israel's high quality and well-connected road network is able to meet the demand of supply chains. ■ Financial incentives are in place to encourage investment in certain economic sectors, including high technology and research and development industries. ■ The risk of criminal activity affecting foreign workers and business property is not high, meaning expensive extra security measures will not need to be taken. Weaknesses ■ The quality of education varies between secular Israelis and the ultra-Orthodox (Haredi) community and Arab areas, limiting the number of highly skilled Haredim and Arab workers in the labour pool. ■ Strikes and other disputes have disrupted supply chains using Israel's ports and airports. ■ Israel's attractiveness as a location for investment is diminished by its high corporate tax rates. Opportunities ■ Israel faces several external threats from both state and non-state actors. ■ The quality of tertiary education is high and ensures a constant supply of well qualified graduates. ■ Short lead times and low costs make Israel one of the most attractive locations for trading in the MENA region. ■ There are plans underway to break up large business groups which enjoy a monopoly in certain sectors, which will increase competition and investment opportunities. ■ International efforts to find a resolution to the Israeli-Palestinian conflict will continue. © Business Monitor International Ltd Page 13 Israel Information Technology Report Q4 2015 SWOT Analysis - Continued Threats ■ The unionisation of the workforce means that there is a high risk of strikes and labour disputes disrupting business activity. ■ Extended fuel supply chains increase the risk of disruption causing fuel shortages. ■ The long delays associated with registering property and obtaining construction permits will deter investors looking to launch business in the country. ■ Increasing regional instability due to the activities of the Islamic State in Syria and Iraq poses further risks on Israel's borders. © Business Monitor International Ltd Page 14 Israel Information Technology Report Q4 2015 Industry Forecast Table: IT Industry - Historical Data And Forecasts (Israel 2012-2019) 2012 IT market value, ILSmn 2013 2014e 2015f 2016f 2017f 2018f 2019f 21,506.1 21,095.8 21,823.6 23,076.3 24,218.6 25,177.6 26,139.4 27,075.2 Computer hardware sales, ILSmn 6,495.3 6,202.6 6,197.9 6,346.0 6,490.6 6,546.2 6,534.9 6,498.1 Personal computer sales, ILSmn 3,370.4 3,198.7 3,225.4 3,338.6 3,451.7 3,518.6 3,549.7 3,566.8 Software sales, ILSmn 5,186.1 5,182.8 5,503.8 5,945.8 6,323.1 6,533.6 6,819.8 7,131.6 Services sales, ILSmn 9,824.7 9,710.5 10,121.9 10,784.6 11,404.9 12,097.9 12,784.8 13,445.6 IT market value, % of GDP 2.2 2.0 2.0 2.0 2.0 2.0 1.9 1.9 e/f = BMI estimate/forecast. Source: BMI BMI undertook a significant revision to our Israel IT market forecast in the Q415 update, including a reassessment of market growth dynamics in 2013 and 2014. We now estimate a smaller hardware market, and revised up our estimate for the size of the IT services market. We now estimate the IT market grew by 3.5% in local currency terms to a value of ILS21.8bn in 2014, equal to 2% of GDP. Under our revised outlook, we continue to hold the view that the Israeli IT market will experience slow and steady growth over the medium term, with a compound annual growth rate (CAGR) of 4.4% forecast 2015-2019. Growth will be subdued relative to emerging markets in the Middle East as a result of the saturation of the hardware and software/services market in Israel, a characteristic that is exacerbated by price competition between vendors. BMI forecasts the Israeli IT market will reach a total value of almost ILS27.1bn in 2019. We expect IT services will be the fastest growing segment of the IT market, slightly ahead of software, with both growing fast relative to hardware. In terms of key verticals, the financial services and defence sectors drive growth, with rising geopolitical tensions likely to result in even stronger demand for IT security solutions. The nature of sales will change, however, as business management, efficiency improvements and data analytics becomes increasingly important and the hardware segment contributes comparatively less to the market's overall growth. © Business Monitor International Ltd Page 15 Israel Information Technology Report Q4 2015 2015 Outlook BMI forecasts IT market growth of 5.7% in 2015 to a value of ILS23.1bn, but as a result of depreciation we expect a contraction of 3% in US dollar terms. Our in-house Country Risk team for Israel forecasts shekel deprecation against the US dollar from an average of ILS3.6/USD in 2014 to ILS3.9/USD in 2015. This will erode Israeli purchasing power in global markets, ie for imported products, and result in some deferred purchases, but more prominent will be increased price sensitivity and substitution for lower cost alternatives. The impact of depreciation will be most significant in the hardware segment, where we forecast a contraction of 6.1% in US dollar terms in 2015. Aside from depreciation the economic environment in Israel will remain broadly supportive in 2015. We forecast real GDP growth of 3.1% in Israel in 2015, while private final consumption growth is forecast at 5.8%, with both stronger than the figures for 2014. In the IT market it is cloud computing that is expected to outperform in terms of growth in 2015. The underlying driver continues to be organisations looking for efficiencies turn to more flexible and affordable software-as-a-service and infrastructure-as-a-service. Particular areas of opportunity for cloud computing include banking and retail, as organisations in those fields look to save money on hardware and improve customer services. In the hardware segment, household computer penetration of 85% at YE2013 illustrates the limited potential for growth derived from first time buyers, but there are several factors pushing multiple device ownership. Innovation in form factors, including tablets and hybrids will push sales of personal devices, while investments by telecoms operators to expand the reach of high capacity wireless and wireline broadband services will catalyse demand for personal devices. With the full launch of 4G LTE networks in 2015, spending will continue to move away from notebooks as consumers favour more mobile devices such as smartphones and tablets. Despite the shift from notebooks toward tablets, BMI expects the hardware segment to maintain growth, owing in no small part to Israel's relatively wealthy consumer base and their preference for premium Apple and Samsung devices. © Business Monitor International Ltd Page 16 Israel Information Technology Report Q4 2015 Industry Trends - IT Market (2012-2019) 30,000 20,000 10,000 0 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f IT market value, ILSmn e/f = BMI estimate/forecast. Source: BMI Over the remaining years to 2019, we expect slow but steady growth in the economy. Our in-house Country Risk team forecast average annual GDP growth of 2.8% 2016-2019, and BMI also forecasts underwhelming expansion of private consumption growth at an average of 3.0% annually 2016-2019. We do however point to the prospects of stronger performance over the longer term as gas resources currently under development come online from 2019. In the Q4 update, BMI has introduced a medium-term household income analysis to the IT market forecast, which we believe illustrates medium-term trends that have particular relevance for hardware vendors. Looking first at the distribution of households in 2015, Israel is a high-income market within the Middle East and Africa region, only trailing the oil-rich GCC states. In 2015 our Country Risk team forecasts with just 6% of households forecast to have incomes below USD5,000 (the level we consider the purchasing power threshold for IT market participation). The majority of households in Israel in 2015 are middle income, reflected in relatively high levels of per capita spending, but there is also a large premium segment of households with incomes of over USD50,000 (see chart below). © Business Monitor International Ltd Page 17 Israel Information Technology Report Q4 2015 Over the medium term, the most prominent trend will be the migration of mid-market Israeli households. This should help alleviate some of the price sensitivity pressure on vendors in the mass market, a shift from recent years when the hardware market has been characterised by tablet cannibalisation of notebook volumes, as well as price erosion as lower cost tablets made headway among price-sensitive population segments. Our analysis of household income trends indicates potential for an easing of price pressure on PC vendors over the medium term, as they have the potential to up-sell higher-value models as households acquire additional disposable income and purchasing power in global markets. Israel Household Income Distribution (%) LHS And Change By Income Level ('000) 2015f (LHS) & 2015-2019f (RHS) f = BMI forecast. Source: BMI, national sources Segments BMI expects IT services will display the fastest growth over the forecast period to 2019 owing to the opportunities presented by cloud computing, big data analytics and real-time enterprise services based on the internet of things. The financial sector and defence continue to be the primary verticals for IT software and services, with rising geopolitical tensions in the Middle East likely to drive strong demand for cyber and information security solutions. World Bank data show that Israel's military expenditure accounted for © Business Monitor International Ltd Page 18 Israel Information Technology Report Q4 2015 5.6% of GDP in 2013, among the highest in the world, underpinning the IDF's ability to make a major contribution to IT spending in Israel. Meanwhile, intensifying competition in Israel's telecoms sector is driving operators to pursue convergence strategies through acquisitions and to generation operational efficiencies through network sharing agreements. This will require operators to spend on integrating separate IT systems, while also encouraging them to reduce their operating costs by outsourcing more business operations to managed service providers, thus creating opportunities for IT vendors. Other sectors of opportunity will include healthcare, infrastructure, transport and the small office and home office sector. While large organisations still dominate, small- and medium-sized enterprises (SMEs) have been investing more and represent a growth opportunity. Many SMEs are waking up to the need to compete through more direct investment in support and service infrastructures. Cloud computing is a field which could gain traction with SMEs as the on-demand model fits well with their smaller budgets and lack of demand for bespoke in-house solutions and software. There is a sizeable potential customer base for vendors to tap into, with World Bank data showing an average of more than 15,000 new businesses a year registered in Israel between 2005 and 2012. © Business Monitor International Ltd Page 19 Israel Information Technology Report Q4 2015 Macroeconomic Forecasts Economic Analysis BMI View: The Israeli economy will see a slight uptick in growth in H215, driven primarily by private consumption, as government expenditure remains capped by the absence of a budget for 2015. From 2016, we expect public spending and gross fixed capital formation to return to higher levels, thus contributing more significantly to economic growth. Overall, the Israeli economy will expand by 3.1% in 2015 and 3.4% in 2016, from 2.6% in 2014. Israeli economic growth will moderately accelerate in H215, driven primarily by private consumption. As we had expected, the impact, and rebound, from the Gaza conflict has run its course, with growth returning to a more stable trajectory: economic growth fell to an annualised 2.5% quarter-on-quarter (q-o-q) in Q115, from 6.6% in Q414. We forecast economic growth to reach 3.1% in 2015 and 3.4% in 2016, compared to 2.6% in 2014. In 2015, private consumption will be the key driver of the economy, as government spending remains limited by the absence of a budget for 2015, while gross fixed capital formation (GFCF) remains subdued, despite the Bank of Israel maintaining an ultra-low interest rate throughout the year. Sustained strong growth in private consumption, coupled with increasing exports and a subsequent acceleration in GFCF growth, underpin our positive view for the Israeli economy over the next five years: we forecast real GDP growth to average 3.4% over this period. © Business Monitor International Ltd Page 20 Israel Information Technology Report Q4 2015 Limited Acceleration Ahead Israel - Real GDP Growth, % 7 6 5 4 3 2 2019f 2018f 2017f 2016f 2015f 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 1 f= BMI forecast. Source: BMI, Central Bureau of Statistics Expenditure Breakdown Government Spending Outlook: Binjamin Netanyahu's dissolution of the Knesset in late 2014 led to the parliament being unable to adopt a budget for 2015. As a result, public spending has been capped and will remain so until a budget is approved (in the meantime, public expenditure is limited to last year's budget figures). We therefore expect government consumption to increase by only 1.5% in 2015, and this view has been supported by the latest relevant data released by the Central Bureau of Statistics: public spending grew by a mere 0.7% year-on-year in Q115, compared to an average of 4.5% in the past 10 years. © Business Monitor International Ltd Page 21 Israel Information Technology Report Q4 2015 Absence Of 2015 Budget To Create Two Years Of Volatility Israel - Government Final Consumption, Real Growth % chg y-o-y 8 6 4 2 2018f 2017f 2016f 2015f 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 0 f= BMI forecast. Source: BMI, Central Bureau of Statistics Due to the absence of a 2015 budget, the new coalition government is currently instating a biennial state budget that will cover this year and next, to be ratified within 175 days of the formation of the government. We expect to see a sharp increase in public spending taking place in 2016, increasing by 6.5%, partly as a result of this year's cap and induced low base effect but also as the newly re-elected prime minister promised the different parties that joined his coalition to push through policies that will cost more than USD2.0bn to the state's budget - in particular reducing VAT on food products and rolling back on reforms that cut subsidies to the ultra-Orthodox community. Private Consumption Outlook: We expect consumer spending to be the main driver of the economy in 2015, and remain strong in 2016, growing respectively by 5.8% and 4.3%. This year's strong growth will come as a result of inflation remaining subdued - partly on the back of low global oil prices - and the unemployment rate staying at a very low level. The joblessness decreased to a record-low 4.9% in April, after it reached 5.4% in Q115, compared to 5.7% for 2014. In addition, the monthly private minimum wage was raised to ILS4,650 in April and will again be increased by ILS175 within 18 months, and a year later by another ILS175, reaching ILS5,000 by December 2017. Finally, monetary policy will remain © Business Monitor International Ltd Page 22 Israel Information Technology Report Q4 2015 accommodating in H215 as inflation reaches 1.0% by the end of 2015, the bottom end of the government's target range of 1-3%. As a result, the Bank of Israel (BOI) will maintain its policy rate at 0.10%. Private Consumption Key Driver Of Growth Israel - Contribution To Real GDP Growth By Expenditure, % f=BMI forecast. Source= Central Bureau Of Statistics, BMI Fixed Investment Outlook: Despite extremely low interest rates - the Israeli repo rate currently stands at 0.1% - GFCF decreased in Q115 by 5.8% q-o-q annualized - making it the fourth quarter in five that the figure has been in negative territory. We still expect GFCF to pick up in the next quarters - investment in residential construction rose by 1.7% in Q115, the first such increase in seven quarters - given very low lending rates. However, this will take place at a slower pace than we had previously anticipated. © Business Monitor International Ltd Page 23 Israel Information Technology Report Q4 2015 No Impact For Now Israel - Policy Rate, % And GFCF, % chg q-o-q Annualised (LHS) And GCFC, % chg y-o-y (RHS) f=BMI forecast. Source: National Sources, BMI Our five-year outlook for gross fixed capital formation remains positive, with an annual growth of 3.7% over the period. In particular, the energy sector will attract high-levels of investment: in November 2014, Israel-based Delek Drilling outlined a major upgrade programme for the Tamar gas field, with the plan estimated to cost between USD1.5bn and USD2 bn. In addition, we expect that the Leviathan gas field Israel's largest proven gas reserves - will come onstream in 2019, requiring large amounts of capital being invested in the country. Net Exports Outlook: We believe Israeli exports will expand by 4% in 2015 and 4.1% in 2016. For 2015, a gradual improvement in macroeconomic conditions in the European Union - which accounted for 15% of total Israeli exports in 2013 - and a relatively weak shekel will support growth. From 2016, Israel will begin exporting gas and this will offset the negative impact of a modest appreciation of the shekel. Imports will expand by 5.0% in 2015 and by 7.5% in 2016, at a faster rate than exports. This acceleration in import growth - from 2.3% in 2014 - will come as a result of an uptick in domestic consumption and fixed investment, on the back of stronger economic growth. © Business Monitor International Ltd Page 24 Israel Information Technology Report Q4 2015 Table: Economic Activity (Israel 2010-2019) Nominal GDP, USDbn Real GDP growth, % y-o-y GDP per capita, USD 2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f 233.3 258.4 257.3 290.6 303.8 291.7 320.4 349.5 371.5 396.3 5.8 4.2 3.0 3.2 2.8 3.1 3.3 3.5 3.4 3.6 31,438 34,261 33,664 37,584 38,835 36,829 39,916 42,910 44,947 47,240 Population, mn 7.4 7.5 7.6 7.7 7.8 7.9 8.0 8.1 8.3 8.4 Industrial production, % y-o-y, ave 8.1 1.9 3.6 -1.3 1.3 0.5 3.2 5.2 5.9 6.0 Unemployment, % of labour force, eop 6.6 5.4 6.7 5.9 5.7 5.8 6.0 6.0 6.0 6.0 f=BMI forecast. Source: National Statistics, BMI © Business Monitor International Ltd Page 25 Israel Information Technology Report Q4 2015 Industry Risk Reward Index Middle East And Africa Risk/Reward Index The Q415 update to the Middle East and Africa (MEA) IT Risk/Reward Index (RRI) is consistent with the previous quarter, with only a few changes to market scores and positional changes. The region continues to be highly diverse, with Israel and the lucrative Gulf Cooperation Council (GCC) markets - which are among the highest per capita incomes globally - in stark contrast to the low-income sub-Saharan Africa (SSA) markets that make up the lower positions in BMI's Index. Each country's overall IT score is based on four distinct categories evaluating the growth prospects for hardware, software and IT services vendors across the region. The Industry Rewards category evaluates the growth potential and maturity of the market, based on our proprietary forecasts, as well as the level of government initiative in development of the IT sector. The Country Rewards index assesses the potential for consumers and businesses to spend on IT products and services based on a number of key macroeconomic indicators, including GDP per capita and the rate of urbanisation. These factors are important gauges for the level of consumer demand for IT products and services in any given market. The Industry Risks category reflects the strength of intellectual property (IP) protection and ICT policy in a market, an important determinant in the rate of software piracy and counterfeiting. Finally, the Country Risks category assesses external factors that could affect a country's overall investment outlook and consequently the growth prospects for the IT sector. These factors include short-term external and financial risk, trade bureaucracy, legal frameworks and corruption perception. Israel continues to top the MEA RRI in Q4, with an unchanged score of 69.6 points. Israel's well-developed retail and enterprise markets mean it is a high-spending market, including demand for the latest products and solutions. Security risks aside, the IT market benefits from regulatory certainty and political economic stability that has helped to attract significant investment in a local IT ecosystem that is of global significance. An additional pull factor for IT vendor investment is Israel's highly-skilled IT labour force and the strong culture of innovation that makes it a centre for start-ups. Recent investments include Infosys' USD100mn budget to invest in or acquire Israeli start-ups, PayPal's acquisition of CyActive ahead of the launch of a security centre in Israel, and SoftBank Ventures Korea and Akamai Technologies' strategic investment in mobile network function virtualisation software specialist Saguna. Positions two through to six in the MEA RRI are occupied by the GCC states, with contrasting profiles to regional leader Israel. The strength of the GCC markets are derived to a much greater extent from high incomes per capita, which make them among the most lucrative retail hardware markets globally. There is © Business Monitor International Ltd Page 26 Israel Information Technology Report Q4 2015 also a considerably smaller and less complex enterprise segment - with the oil & gas sector dominating the economies of most GCC states. Finally, the GCC states have weak reputations as technological innovators and incubators, with a lack of competitively priced skilled labour, regulatory uncertainty and high operating costs all significant barriers to closing the gap with Israel. One area where Israel and the GCC states have common ground in our RRI is the elevated risk of cybersecurity incidents when compared to other developed markets in less volatile regions. BMI has long highlighted the threat of political and criminally motivated cyberattacks in the Middle East, with future attacks having the potential to undermine confidence in networked solutions, from cloud computing to egovernment. However, cybersecurity is also a regional opportunity, as enterprises and governments invest to increase cybersecurity capabilities, attracting inward investment to the region from leading IT vendors, security firms and telecoms operators including Symantec, McAfee, Lockheed Martin, Telefónica, Etisalat and Ooredoo. While the GCC states contrast with Israel's strengths and weaknesses - and cybersecurity is a common theme - they are far from a homogeneous grouping of markets. The highest income markets of Qatar and the UAE occupy second and third position in the Q4 RRI based on the lucrative nature of their retail markets. Local consumers have a strong preference for premium-oriented conspicuous consumption, a boon to Apple through its iPad and Mac range, while short replacement cycles and tourist electronics spending also support a buoyant retail market. There is, however, some downside as local retailers pointed to the potential for an easing of sanctions imposed on Iran as likely to result in a decline in retail hardware sales. The large African markets - South Africa, Nigeria and Egypt - occupy positions seven to 10 in the table, with Oman splitting them in eighth position. The three markets score well in the Industry Rewards category, and far ahead of Oman, which suffers due to its small market size. It should however be noted that the largest African markets score highly in Industry Rewards due to their potential and populations, rather than the existing size of the market, which is limited due to low incomes. This is illustrated in the chart below comparing per capita US dollar IT spending by market, forecast by BMI for 2015. The low level of per capita spending explains why the large African markets score very close to the GCC markets in terms of Industry Rewards, despite the far larger local populations. © Business Monitor International Ltd Page 27 Israel Information Technology Report Q4 2015 IT Spending Per Capita (USD) 2015f 1,000 750 500 250 0 2015f Bahrain Israel United Arab Emirates South Africa Kuwait Oman Qatar Saudi Arabia Ghana Kenya Egypt Nigeria f = BMI forecast. Source: BMI There are positive signs for an acceleration of IT sector development in the larger African markets, which BMI believes will contribute to faster growth and assist with the creation of stronger regulatory environments. Egypt particularly stands out through its promotion of the IT outsourcing industry in the years following political crisis, which by 2015 employed a total of 90,000 people in Egypt. In May 2015, the country's Information Technology Industry Development Agency announced that 6,000 new jobs would be created in the offshore outsourcing sector after it completed agreements with IBM, Procter & Gamble, HSBC, Nestlé, Axxcelera, Mobinil Contact Services, Teleperformance and EMC. BMI believes Egypt's outsourcing industry is on a strong growth trajectory with the financial attractiveness of Egypt as a low-cost destination and the fact that Cairo alone produces 200,000 graduates a year (10-15% of whom are multilingual), all major positives. Ghana and Kenya sit at the bottom of the MEA RRI in Q4, limited by low incomes - as are the larger African markets - and also having markedly smaller populations, meaning they receive low scores in the Industry Rewards category. The undeveloped nature of their economies present additional challenges for IT market participants; for example, electricity shortages continue to plague SSA. This has a direct impact on © Business Monitor International Ltd Page 28 Israel Information Technology Report Q4 2015 the IT sector through the additional cost of alternative energy solutions and an indirect impact as customers across other industries divert spending from IT to more critical electricity solutions. Table: MEA IT Risk/Reward Index - Q415 Rewards Risks Industry Rewards Country Rewards Industry Risks Country Risks IT Rank Previous Rank Israel 55.0 100.0 65.0 68.2 69.6 1 1 Qatar 50.8 100.0 55.0 62.5 65.5 2 3 UAE 47.5 90.0 60.0 64.0 62.4 3 2 Saudi Arabia 52.5 75.0 55.0 60.7 59.8 4 4 Kuwait 40.8 100.0 40.0 59.2 58.5 5 5 Bahrain 31.7 85.0 57.5 55.3 52.1 6 7 South Africa 53.3 45.0 45.0 58.2 51.2 7 6 Oman 33.3 65.0 52.5 51.9 46.7 8 9 Nigeria 50.0 30.0 45.0 44.2 43.5 9 8 Egypt 48.3 30.0 45.0 48.3 43.4 10 10 Lebanon 30.0 65.0 20.0 47.2 40.5 11 12 Ghana 35.0 35.0 40.0 51.1 38.5 12 11 Kenya 41.7 10.0 55.0 37.2 34.7 13 13 Average 43.8 63.8 48.8 54.5 51.3 - - Country Scores out of 100, with 100 the highest. The IT Risk/Reward Index comprises two sub-indices 'Rewards' and 'Risks'. Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60%. The 'Rewards' index evaluates the size and growth potential of an IT market in any given state and the country's broader economic/socio-demographic characteristics that affect the industry's development; the 'Risks' index evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's Country Risk Index, that could affect the realisation of anticipated returns. Source: BMI © Business Monitor International Ltd Page 29 Israel Information Technology Report Q4 2015 Market Overview BMI View: In the Q415 update we undertook a revision of historical data for Israel's IT market to reflect changes in underlying growth dynamics, primarily resulting in a downgrade to our estimate for PC market value and an increase to IT services sales. The revised data now better reflects Israel's status as a leading innovation centre in the global IT market, with particular strengths in cybersecurity software and solutions. Under our new forecast, we envisage total IT market spending will grow at a CAGR of 4.4% 2015-2019 to reach a value of almost ILS27.1bn in 2019. Hardware BMI estimates Israel's IT hardware market contracted 0.1% in 2014 to a value of ILS6.2bn. In local currency terms we forecast a return to growth in 2015, with spending expected to increase by 2.4% to ILS6.3bn. This trend is however reversed in US dollar terms, as shekel depreciation forecast by our inhouse Country Risk team for Israel is expected to result in a contraction of 6.1% to USD1.6bn. Depreciation in 2015 will increase the cost of imported hardware in local currency terms, resulting in deferred purchases and substitution of devices for lower cost alternatives, reflected in our view for PC market volume contraction to be smaller in magnitude than the US dollar value contraction. Over the medium term we forecast positive, albeit slow growth with a compound annual growth rate (CAGR) of 1.0% over our five-year forecast from 2015 to 2019. Enterprise hardware demand for products such as servers and storage are expected to increase over the medium term, while the retail PC market has growth potential through personal device sales, despite the limitations posed by a mature market with high levels of household PC penetration. © Business Monitor International Ltd Page 30 Israel Information Technology Report Q4 2015 Hardware Market (2012-2019) 4,000 3,000 2,000 1,000 0 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f Israel - Personal computer sales, ILSmn e/f = BMI estimate/forecast. Source: BMI Market Drivers Israel's growing attraction as an IT research and development hub to international firms and its expertise in cybersecurity have helped to insulate the IT sector from macroeconomic headwinds, which saw the country's GDP growth slow from 5.8% in 2010 to 2.8% in 2014. During 2015, we expect continued modest growth in private consumption, at 3.5%. Additionally, there will continue to be downward pressure on average prices for devices at the global and regional level, which will help offset some of the squeeze on affordability of imported hardware from shekel depreciation. Our Country Risk team forecasts depreciation against the US dollar from an average of ILS3.6/USD in 2014 to ILS3.9/USD in 2015, which will erode Israeli purchasing power in global markets. Depreciation will result in higher prices for PCs because of narrow margins for PC vendors and local retailers, meaning the necessity of profitability will require cost increases are passed on to consumers. This will result in deferred purchases in 2015, and more prominently the substitution for lower-cost devices. © Business Monitor International Ltd Page 31 Israel Information Technology Report Q4 2015 Israeli government policy initiatives are also helping to underpin the hardware market. The government has launched various initiatives to increase computer and internet penetration, such as A Computer For Every Child, now morphing into A Tablet for Every Child, according to Israeli Prime Minister Benjamin Netanyahu, and Digital Israel, a proposed initiative to streamline the digitisation of public sector services, such as education, healthcare and social services. The level of support, however, has been criticised by some industry insiders as too low. Between its launch in 1995 and June 2013, the Computer For Every Child initiative reportedly distributed 55,000 computers in around 2,000 localities, representing a tiny fraction of total hardware sales in Israel. Industry stakeholders see Digital Israel essentially as a duplication of its Government Computing Center. The centre was established in February 2012 and operates under the auspices of the Ministry of Finance, with many of the same goals as Digital Israel. However, Carmela Avner, Israel's first chief information officer who headed the centre, announced her resignation in December 2013 owing to the body's lack of power to implement digital initiatives. Therefore, BMI expects upgrades to new systems, Israel's vibrant local start-up and IT research and development (R&D) markets, and purchases of personal computing devices to remain the bulk of market sales. Mobile computing devices including tablets, slimline notebooks, Ultrabooks and hybrids present a key growth opportunity for vendors as consumers increasingly complement household desktop and laptops with more easily transportable devices. Although tablet computers took longer to reach mass popularity in Israel than other mature ICT markets, this means that unlike in markets where there was a boom in volumes, in Israel we do not forecast a steep decline in volumes after rapid diffusion among the core user group and a lengthening of replacement cycles. Overall, PC penetration is high in Israel at 85% in 2013, comparable to the highest levels of penetration in the Middle East and globally (see chart below), reflecting the maturity of the market and requiring vendors to focus on personal device and upgrade/replacement sales. In contrast, BMI estimates tablet penetration reached just 16.5% of Israeli households in 2013, rising to 23% by YE2014, but still with considerable growth potential over our forecast period. © Business Monitor International Ltd Page 32 Israel Information Technology Report Q4 2015 Middle East Household PC Penetration (%) 2013 Source: National sources, ITU, BMI Evolving Form Factors Prior to 2012, notebooks were the fastest-growing segment of the market, although as recently as 2008 desktops still took around two-thirds of unit sales. In 2010-2011, however the share of desktops declined precipitously, and then in 2012 there was a shift from notebooks to tablets as the fastest growing segment of the market. This trend of preference for mobility is expected to continue over the 2015-2019 forecast period. Despite its declining share of sales, however, the desktop sector is still significant, largely due to business and government end-users. Meanwhile, on the opposite side of the spectrum, Israeli consumers have been slow to embrace tablet devices, with notebooks still accounting for the largest share of PC unit sales in 2014. However, tablets have become increasingly popular since 2012 and BMI expects them to overtake notebooks in terms of unit sales in 2015. The tablet market in Israel has been dominated by Apple. Although Apple has faced tough competition from a broadening pool of tablet vendors, it managed to maintain its dominance of Israel's tablet market © Business Monitor International Ltd Page 33 Israel Information Technology Report Q4 2015 throughout 2013 and 2014. Data from Statcounter show that iOS, run on Apple's tablets, accounted for 65.7% of all tablet browsing traffic in Israel in July 2015. This was down by 6.1 percentage points (pp) y-oy, though still more than four times higher than its nearest rival vendor in Samsung. Apple's dominance of Israel's tablet PC market is in line with our view of strong demand for top-end among a relatively wealthy population. In this context, despite a widening range of Android devices - including the Kindle Fire from Amazon, the Nexus 7 and 10, LG G Pad and Samsung's Galaxy Tab range (all launched new or upgraded models in 2014) - other device manufacturers have made only small inroads into the Israeli tablet market. Statcounter data suggest that Samsung has made the most progress, with its tablets accounting for 13.3% of browsing market share in July 2015, up by 1.4pp y-o-y. ASUS claimed a 3.9% share, Google (LG Nexus) a 2.5% share and all other players claimed less than 1% share each, according to Statcounter. Although Android vendors remain a peripheral influence to tablet market volumes in 2015, the gap between the strategies of some of the leading players is worth noting. On the one hand Apple and Samsung are hardware vendors and look to profit from the sale of devices, while on the other side Google and Amazon are services firms and offer tablets almost at cost. The strategies of services firms (combined with low cost original equipment manufacturer [OEM] tablets from China) will likely put pressure on the margins of hardware centric vendors in the medium term. However, the tablet market remains relatively undeveloped in Israel's hardware sector, which is heavily dominated by Windows machines. When looking at the combined tablet and desktop/laptop computer market, iOS and Android accounted for just 3.2% and 1.3% of total PC browsing traffic, respectively, by July 2015. The event with the largest impact on Israel's PC market was the launch of Windows 8 in October 2012. Windows 8/8.1 account for 17.9% of total PC browsing traffic, while Windows XP has declined steadily and by April accounted for just 9.5% of browsing traffic. Another significant development is the medium term impact on innovation and form factors. Windows has a traditional strength in productivity use cases and software, with the OS being central to the enterprise market and Microsoft's ubiquitous Office Suite. There is therefore an opportunity for vendors to leverage this strength over rival iOS and Android devices by designing tablets with strong productivity functionality alongside the passive media consumption features. Early examples were hybrid devices such as Microsoft's own Surface (RT & Pro), Hewlett-Packard's (HP) Envy and Lenovo's Yoga and Helix. Although design innovation still has room to improve, prices have started to come down and the multi-use device has scope to capture a share of the tablet market by offering a stronger value proposition to consumers while not © Business Monitor International Ltd Page 34 Israel Information Technology Report Q4 2015 compromising on user experience. In its earnings results for the quarter ended December 2014, Microsoft stated that the newer Surface Pro 3 outsold is predecessor the Surface Pro 2 by a ratio of 3:1, indicating that consumers are beginning to embrace the new form factor. PC Volume Forecast (2012-2019) 600 400 200 0 2013 2014e 2015f Israel - Tablet sales, '000 Israel - Desktop sales, '000 2016f 2017f 2018f 2019f Israel - Notebook sales, '000 e/f = BMI estimate/forecast. Source: BMI Vendor Developments The Israeli PC market has undergone significant changes in terms of market shares. In the PC market, the top three vendors, HP, Lenovo and Dell, had enjoyed a combined market share approaching 50%, but while Lenovo has gone from strength to strength, HP and Dell have been hit by competition from ASUS and Samsung - as well as the shift to tablets. In the laptop market Lenovo leapt to top spot in 2012 with a market share of 21.2%, according to IDC Israel, overtaking HP and Dell - and it retained top spot in 2013 with a 25% share of sales. In second position was HP with 21% market share, while Dell was reported to be third with a 20% share of PC volumes. ASUS was fourth in 2013 with a 15% share of sales, and finally Samsung and Toshiba were tied in fifth with around a 5% share each. © Business Monitor International Ltd Page 35 Israel Information Technology Report Q4 2015 Chinese giant Lenovo has built its strong position in the Israeli market following its purchase of IBM's PC unit in 2005, and through increased investment into the country. In 2012, Lenovo claimed that it had top spot in the commercial laptop market in the country, and that it was the second largest PC vendor overall. Acquisitions and strategic investments are part of Lenovo's strategy to consolidate its position in the Israeli market, and in February 2012 the vendor announced that it would invest in Vertex Venture Capital's new venture capital fund. The investment is aimed at helping Lenovo to build a solid R&D base in the country, with priority areas including enterprise IT, infrastructure and greentech, and digital media technology and applications. In September 2014 Lenovo's senior vice president met with hundreds of Israeli start-ups and suggested that the company was considering establishing a R&D centre in the country. Lenovo is far from the only multinational PC vendor to be increasing its R&D investment in Israel. In 2012 Apple opened a research centre in Haifa and in December 2013 it opened its third Israeli research centre in Ra'anana. Dell set up an R&D centre in the country in 2011, Toshiba announced plans to open one in early 2014. In 2013, Samsung announced it would open of its three global innovation and strategy centres in Ramat Gan, Israel (the other two are in Silicon Valley and South Korea). Software BMI estimates that Israeli software spending increased to ILS5.5bn in 2014, up 8.3% from 2013, with underling enterprise software and cybersecurity solution demand growth supplemented by operating system (OS) upgrade demand in 2014 as a result of Microsoft withdrawing official support for the legacy XP OS in April 2014. We expect growth in the software segment to decelerate in 2015 after some upgrade demand was brought forward, while shekel depreciation against the US dollar will result in a small amount of deferred purchases, but demand growth will remain strong at 5.9% in local currency terms in 2015. This will however translate into a contraction of 2.8% in US dollar terms in 2015 under our core scenario. We forecast a local currency CAGR of 5.3% 2015-2019, with total spending expected to reach ILS7.1bn in 2019. This is a slight deceleration from 2015 in local currency terms, but a marked improvement in US dollar terms as a result of our in-house Country Risk team for Israel's outlook for shekel appreciation from 2016. This will boost demand for systems and upgrades in the private sector, adding to public sector investments form government organisations such as the Israeli Ministry of Defense and Israeli Police, and from utilities leader Israel Electric Company. © Business Monitor International Ltd Page 36 Israel Information Technology Report Q4 2015 Enterprise Software In 2014, leading software vendors in the Israeli market reported steady, single-figure growth, much in line with our forecast. Leading Israeli software and services group Formula Systems-owned Matrix, which derives most of its revenues from the Israeli market, reported 8.8% revenue growth during 2014. Opportunities for software vendors in Israel exist across a range of sectors; from government to energy, financial services, telecoms and utilities. Major customers for software solutions in Israel include large and medium enterprises such as commercial banks, loan and mortgage banks, credit card companies, insurance companies, telecoms service providers, hi-tech companies, and the Israeli Defense Forces, government ministries and public agencies. In terms of verticals, the financial sector has been a mainstay of demand, with other key areas including defence and healthcare. IT spending from the financial services vertical has been positively impacted by regulatory reform and changes affecting banking and insurance in the wake of the global financial crisis. Such changes generated demand for specific IT solutions, often in a set time period. Israeli legislation passed in 2010 and 2011 increased Israeli Securities Authority regulatory supervision over the offering of investment services and administration of investment portfolios. This in, turn, increased demand for solutions for entities that became subject to such supervision. Similarly, defence spending on new systems is likely to be maintained, given increased security risks following eruption of violence between Israel and Gaza in June 2014 as well as the destabilising impact of Islamic State on the wider region. In April 2014, Israeli news portal Jerusalem Post reported that the Israel Defense Forces (IDF) is developing its own cloud computing network, which it expects to launch by the end of 2014. The cloud computing platform will reportedly allow commanders to receive real-time intelligence on enemy targets and friendly forces from remote locations. The IDF is also implementing other IT solutions to strengthen its operations, such as a specialised training programme for open source technologies Python and Ruby on Rails. In August 2013, the IDF also launched an internal platform called Yohanan, which allows soldiers to use open-source software components created within the military organisation. Meanwhile, the small- and medium-sized enterprise (SME) segment, the mainstay of the Israeli business sector, has emerged in recent years as an important growth area for enterprise systems. The SME sector will become more important in 2015, as the government cuts on non-essential spending in order to service debts relating to the June-August war with Gaza. SME spending on enterprise solutions should continue to grow © Business Monitor International Ltd Page 37 Israel Information Technology Report Q4 2015 steadily, with reviving or emerging areas of opportunity including security, customer relationship management (CRM) solutions and business intelligence. Software Market (2012-2019) 7,500 5,000 2,500 0 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f Software sales, ILSmn e/f = BMI estimate/forecast. Source: BMI Current areas of enterprise demand include management of Microsoft systems and servers, as well as systems management, basic data management, firewalls, enterprise resource planning (ERP) implementation and CRM. The sheer volume of data that enterprises must now handle as a result of device proliferation is fuelling investments in business analytics. Operating Systems The most recent browsing traffic data for desktop and notebook traffic in Israel show Windows 8/8.1 accounted for the second largest share of traffic by July 2015 at 17.9% of the total, after surpassing Windows XP in October 2014, with the share of traffic attributable to 8/8.1 up by 6.0pp y-o-y. Initial migrations to Windows 8, launched in October 2012, were lacklustre due to low-key pre-launch publicity for the new system and a relatively small array of new devices. This trend supported BMI's view that the © Business Monitor International Ltd Page 38 Israel Information Technology Report Q4 2015 new OS is set to have a lengthier but less pronounced short-term impact on software sales than previous Windows releases. However, Windows 8/8.1 is likely to be approaching its peak in 2015 in terms of share of devices. In January 2015, Microsoft unveiled details about the forthcoming Windows 10 OS, which will be available for free for the first year to users of Windows 7 and 8/8.1 and will be a single platform across PCs, tablets, smartphones and the Xbox. BMI believes the offer of a free first year could see a significant migration momentum after the release of Windows 10 in July 2015. The fact the new OS is being given away for free for the first year also reflects Microsoft's decreased focus on monetising its Windows OS product, moving it closer to the strategies of Google (Android, Chrome) and Apple (iOS and MacOSX) that use their operating systems to respectively generate revenue from advertising and hardware sales. We believe Microsoft will increasingly use Windows OS as a means of maximising Microsoft's device penetration, with sales generated from additional products and solutions. We believe that migrations from XP, for which support was withdrawn in April 2014, increased the momentum of upgrades in 2014, but by 2015 opportunities were beginning to become diminished, and as such Windows 10 is expected to be a more significant development for the operating system market in Israel in 2015 (see chart below). © Business Monitor International Ltd Page 39 Israel Information Technology Report Q4 2015 Israel PC Browsing Traffic Share By OS (%) And y-o-y chg July 2015 Source: Statcounter Cybersecurity The security software segment is one of the fields with the greatest opportunity in Israel, potentially worth hundreds of millions of dollars over the medium term as awareness of security issues grows in tandem with the rise of cloud computing. Owing to the country's geopolitical situation, Israeli companies, organisations and the government are highly sensitive to cyber threats, and local IT firms have responded to the heightened demand by developing some of the world's most advanced IT security software. BMI believes research and spending is likely to continue across all software segments, although with security content and threat management remaining the current priorities. Due to its sensitive geopolitical position and supported by its well-educated population, Israel has a vibrant domestic cybersecurity market. Check Point, Imperva and CyberArk are listed companies, while in March 2013 Israeli security services company Incapsula, an Imperva subsidiary, was valued at around USD950mn after proving successful among SMEs. Incapsula provides high-end firewalls to assess © Business Monitor International Ltd Page 40 Israel Information Technology Report Q4 2015 incoming traffic and identify possible bugs. Incapsula was established in 2009, created by three Imperva employees. There has also been significant inward investment from global software vendors looking to establish R&D presence in Israel. For instance, in October 2014 global software security provider Kaspersky Lab announced plans to open a development centre in Israel in 2015 and in June 2015 AVG Technologies, opened an R&D centre in Tel Aviv to focus on emerging mobile threats. Meanwhile, in July 2015 it was reported that Microsoft was set to acquire Israeli cloud security firm Adallom for USD320mn, and under the terms of the agreement Microsoft will establish a cybersecurity business centre in Israel, building on the cloud security expertise provided by Adallom. Piracy The latest Business Software Alliance (BSA) survey shows Israel to be one of the strongest markets in the Middle East and Africa region in terms of its record on software piracy compared to its peers with an estimated incidence of software piracy of 30% in Israel in 2013. In fact Israel's piracy rate is comparable to the most developed global markets such as those in Western European markets, whereas piracy remains a problem in some of the high income Middle East markets (see chart below). © Business Monitor International Ltd Page 41 Israel Information Technology Report Q4 2015 MEA Piracy Rates* (%) 2013 *those responding that they always, mostly, occasionally, or rarely pirate software. Source: BSA Global Survey 2013 Vendor Developments The growing emphasis of many multinational IT vendors on software and services revenues has led several of them to direct more investment into R&D at the Israeli market. In June 2014, Israeli security analytics company Fortscale announced that it raised USD10mn in funding from Intel Capital and Blumberg Capital to expand its R&D program. Also in June, cyber security start-up Hexadite announced a USD2.5mn in seed funding for its operations. In July 2014, Microsoft, cloud services provider Akamai Technologies and Jerusalem Venture Partners (JVP) collaborated to work on a cybersecurity accelerator. The move is in line with Microsoft's effort to provide start-ups with a programme and market expertise to aid them in accelerating their business and to create milestones in cyber security. At the end of the programme, one of the cyber security start-ups will be provided with an investment of USD1mn. Earlier in 2014, IBM also announced plans to open an IT security centre in Beersheva, while Cisco and Lockheed Martin both announced plans to increase their investments in the development of the country's IT sector. © Business Monitor International Ltd Page 42 Israel Information Technology Report Q4 2015 Israel's strong reputation as a hotbed for innovative software development has made Israeli companies popular takeover targets for multinationals. In September 2013, IBM completed its acquisition of Israeli-US enterprise security firm Trusteer, for an estimated USD1bn. Trusteer's customers reportedly include seven of the top 10 US banks and nine of the top 10 UK banks. In April 2014, US-based Palo Alto Networks confirmed its acquisition of Tel Aviv-based Cyvera, which has developed software to protect computers running Windows software, including ATMs, from unknown, zero-day cyberattacks. Palo Alto did not confirm the value of the transaction, but industry experts estimated it at around USD200mn. European enterprise software leader SAP is also looking to leverage the skills base of the Israeli market as it focuses on three key technology areas: mobile, in-memory computing and cloud computing. SAP is developing more mobile business applications that could be deployed across a variety of devices, including tablets. In-memory computing, a technology which SAP is developing through its HANA solution, is expected to revolutionise the way companies handle big-data. SAP Labs Israel has been at the forefront of SAP's work in this area, with more than 100 local developers participating in the development of the HANA in-memory solution. Israeli developers were also responsible for the creation of the company's Real Time Offer Management solution, which is currently being tested by French supermarket chain Casino. Cloud Computing The cloud computing market in Israel has strong growth prospects over the medium term. On the supply side, data centre investment and improvements to network capacity and coverage will be the foundation for more widespread adoption. Meanwhile, global and regional cloud vendors continue to develop and expand product offerings, which should unlock spending growth as awareness of the potential benefits of cloud services increases. One area BMI believes to be particularly fertile ground for cloud vendors over the medium term is the small- and medium-sized enterprise (SME) market. The more favourable cost profile of cloud services - for both software and infrastructure - should see a deepening of the SME market, translating to organic growth rather than the cannibalisation of traditional IT revenue streams. Overall we forecast cloud sales growth of 24.4% in 2015 and a CAGR of 20% to a value of ILS2.0bn in 2019. There is however downside to our bullish outlook for cloud service adoption in Israel due to the cybersecurity threat in the Middle East region. Political tensions in the region, and a recent history of state supported cyber attacks, has made the region the highest risk globally, with the possible exception of South Korea. Israel has moved to improve cybersecurity defences at the state and private sector level, so we do not © Business Monitor International Ltd Page 43 Israel Information Technology Report Q4 2015 argue there is an inherent weakness, but rather than a targeted cyberattack is an unknown that could undermine confidence in, and therefore adoption of cloud solutions. Cloud Computing Market (2012-2019) 2,500 2,000 1,500 1,000 500 0 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f Israel - Cloud computing spending, ILSmn e/f = BMI estimate/forecast. Source: BMI Given the current focus of many businesses on controlling costs, the pay-on-demand software-as-a-service (SaaS) model has grown in popularity and spread beyond the initial core application area of CRM. New cloud computing offerings and increased competition in this segment should fuel further demand from users. As well as cost savings, businesses will look to boost efficiency and increase flexibility of response to customer needs. Large businesses are most likely to put IT applications such as mail, phone systems and document management into the cloud. However, enterprise applications that require a high level of customisation, or which are subject to regulatory or data-sensitivity constraints, are more likely to stay on premise. While large organisations still dominate demand for services, SMEs have also been investing more, representing a growth opportunity. Many SMEs are waking up to the need to compete through more direct investment in support and service infrastructures. These factors are driving an increase in demand for © Business Monitor International Ltd Page 44 Israel Information Technology Report Q4 2015 managed services among SMEs, which are keen to leverage the operational efficiencies offered by SaaS and IaaS solutions. Telecoms operators are important players in the cloud computing ecosystem, leveraging their data networks and extensive relationships with local enterprises. This is not unique to Israel, with partnership formation between telecoms operators and global cloud specialists a trend across the Middle East and globally. Most recently in Israel, fixed line operator Bezeq selected US-based DataDirect Networks' Web Object Scaler (WOS) for its cloud storage service offering. Bezeq believes the WOS will enable it to save costs in storage and administrative overheads through the highest utilisation of square metres in its datacentre. In addition, WOS will also reduce the time taken to store data. Israel Positioned At Forefront Of MEA Cloud Adoption Secure Server Density, 2014, LHS & Cisco MEA Cloud Traffic Forecast, RHS Source: World Bank, Cisco VNI 2014 Services The IT services segment is estimated to have reached a value of ILS10.1bn in 2014. BMI forecasts this to continue expanding at a CAGR of 5.8% over the next five years to reach ILS13.4bn in 2019. In 2014 and Q115 vendors reported a continued flow of new projects in sectors such as government, financial services, homeland security and utilities. Matrix's chief rivals in its domestic IT services market include fellow Israeli IT services giant Ness Technologies (whose local segment Ness Israel was acquired by Hilan in June 2014) as well as Team- © Business Monitor International Ltd Page 45 Israel Information Technology Report Q4 2015 Malam, One-1, Taldor Computer Systems, the Elad Group and Yael. These local firms also compete with international players such as HP and IBM. International vendors in the Israeli market often work with local subcontractors. The IT services market is affected by regulatory reform, which influences and drives demand in sectors such as; government, with much spending related to e-government targets; financial services, where an increase in regulatory supervision has necessitated new IT investments; and telecoms, where spending is driven by the roll-out of new platforms and services. In August 2012, Ness was awarded a 10-year contract from Israel's Ministry of Finance to establish and operate the country's new National Long-Term Savings and Insurance Exchange. The new exchange is expected to streamline work processes, and provide the public with information about the retirement savings and insurance plans on offer. So important is the project to Ness that the company established a dedicated subsidiary to develop and operate the National Exchange, including a service and support centre. IT Services Market (2012-2019) 15,000 10,000 5,000 0 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f Israel - Services sales, ILSmn e/f = BMI estimate/forecast. Source: BMI Defence and government spending represent a significant component of Israeli IT demand and have some immunity to economic vicissitudes. The Ministry of Defence has awarded a number of multimillion-dollar © Business Monitor International Ltd Page 46 Israel Information Technology Report Q4 2015 IT contracts, including a USD10mn tender for a new command and control system and a data centre contract awarded to VMware in December 2013, which Jewish Business News valued around USD27mn. In 2013 HP's IT services operations in Israel suffered a setback as communications equipment vendor ECI sued HP Israel for ILS38mn in April 2013, claiming HP did not meet the terms of an agreement to upgrade its computer systems. In 2010 ECI contracted HP to provide its computing requirements including maintenance support and upgrades in a deal worth USD120mn over 10 years. This made it one of the largest such contracts in Israel, and ECI became one of the first Israeli companies to switch to cloud computing and utilise a server farm in France. However, HP cancelled the contract in February 2013, claiming ECI had breached the contract and was in arrears. ECI claimed HP had failed to provide services promised, meeting none of the eight milestones it had set for April 2011 and the cloud computing element was only supporting 900 users, rather than ECI's 3,000 employees, as required. In May 2013, HP counter-sued ECI for ILS83mn for breach of contract. At the time of writing, there was no further news on developments in the court cases. Outsourcing Although Israel seemingly possesses many advantages as an outsourcing destination (in particular a technologically-literate, linguistically-skilled workforce and low labour costs relative to most developed countries), the country has failed to capitalise on these strengths. Aside from Israel's small size, security also weighs on the country's attractiveness as an outsourcing destination. However, the government began promoting Israel to multinationals several years ago, which has resulted in a spate of call-centre construction projects. The work seems to be paying off, with Israel starting to emerge as a desirable location for packaged applications and localisation services. Matrix also competes in Israel's offshore IT outsourcing market. © Business Monitor International Ltd Page 47 Israel Information Technology Report Q4 2015 Industry Trends And Developments Israel stands out as a major investment destination for IT software development in the Middle East. This is due to a combination of factors, including a relatively large defence budget, with a considerable proportion spent on IT products and solutions, a large pool of domestic skilled labour, and a high technologypenetration rate. Many of the biggest global technology firms run Israeli research centres, including Cisco Systems, Microsoft, Google, Apple, IBM, Oracle, SAP, EMC, Motorola, Hewlett-Packard (HP), Facebook and eBay. More IPOs In Israel's IT Pipeline Israeli content monetisation firms Taboola, Outbrain and IronSource are all on track for IPOs worth USD1bn in the next two years. The size of their valuation is not only linked to the opportunities in digital advertisement, but also to their swelling data troves and increasingly sophisticated Big Data Analytics tools. Israel-based Taboola and Outbrain are market leaders in embedding recommended links to articles, videos and lists (think '10 Best Vacation Spots In Cuba', for example) into clients such as Fox News and Rolling Stone's websites. According to research by comScore Inc, users clicked through to more than one billion links recommended by Taboola and Outbrain in December 2014. In February 2015, Taboola closed a USD117mn funding round, which reportedly pegs the company's value at nearly USD1bn. In October 2013, Outbrain raised USD35mn in funding and in 2014 filed with the US SEC for a Nasdaq IPO, which would reportedly give it a valuation of around USD1bn if it goes ahead with the plans. Meanwhile, IronSource estimates that its coreInstall and coreMobile platforms account for around 30% of desktop downloads and 5-10% of app downloads, generating revenue of USD250mn for the company in 2014. In February 2015, it closed a pre-IPO funding round of USD105mn, which it will use to fund acquisitions and reportedly values the company at well over USD1bn. The attraction for investors in Taboola, Outbrain and IronSource is not just their success in the recommended links and software download markets, but also the valuable data they are collecting on consumer preferences and spending habits, as well as the Big Data Analytics tools they are developing. All three companies' strength in their respective fields clearly demonstrates their ability to turn data troves into actionable insights. As all companies' advertisement strategies need to become ever more personalised to ensure competitiveness, Taboola, Outbrain and IronSource's consumer data will become a standalone product, delivering additional revenue. © Business Monitor International Ltd Page 48 Israel Information Technology Report Q4 2015 Intel Makes Record-Breaking Investment In Israel Intel is set to remain ingrained in the Israeli IT market over the long term, following news in April 2014 of plans to invest around USD6bn to upgrade its Kiryat Gat chip plant, according to a statement by Israel's economics minister, Naftali Bennett. The Israeli government approved the plan in September 2014, confirming that it will give Intel a grant of USD300mn over five years. Intel will also be allowed to pay a corporate tax rate of just 5% for a 10-year period. In exchange, by 2023 Intel will create an additional 1,000 jobs at the chip centre, which currently employs around 2,500 people. In July 2015, Intel launched a start-up accelerator programme for nurturing and promoting Israeli start-ups. Under the programme, titled Intel Ingenuity Partner Program (Intel IPP), Intel will provide the start-ups with an expert mentor and access to several resources in its facilities. Nine Israeli start-ups, including Lexifone and Extreme Reality, were selected for the first six-month cycle of the Intel IPP. During the initial cycle, the firms will be able to exhibit a proof of concept or joint project or demonstration of their idea, consider joint marketing initiatives and generate opportunities for a business idea which will profit both the start-up and Intel. Israel As A Global Research And Innovation Hub In July 2015, it was reported that Microsoft was set to acquire Israeli cloud security firm Adallom for USD320mn, and under the terms of the agreement Microsoft will establish a cybersecurity business centre in Israel, building on the cloud security expertise provided by Adallom. The Israeli firm, which had around 60 employees in 2015, would continue to operate in the Middle Eastern country, according to local press reports. In October 2014, global software security provider Kaspersky Lab announced plans to open a development centre in Israel in 2015. The centre will initially be small, with just six employees, but Kaspersky reportedly has plans to increase its research and development (R&D) base in the country over time. In June 2015 another anti-virus vendor, AVG Technologies, opened a research and developments (R&D) centre in Tel Aviv, Israel, to focus on emerging mobile threats. The R&D centre will support more than 120 employees, according to the company's statement. Spanish telecoms company Telefónica teamed up with Israel-based Van Leer Xenia Ventures (VLX Ventures) in October 2014 to invest in Israeli start-up companies. The focus will be on developing the Israeli start-up tech companies in the video, cloud computing, big data, smart homes, wearable technology © Business Monitor International Ltd Page 49 Israel Information Technology Report Q4 2015 and future communication sectors. The Israeli companies will be given investment capital along with the opportunity to scale their products to more than 300mn customers of Telefónica throughout the world. In May 2014, French telecoms network equipment vendor Alcatel-Lucent announced plans to open a Bell Labs branch near Tel Aviv. The new unit will be based in Alcatel-Lucent's existing cloud facility in Kfar Saba and focus on further cloud research, in order to help the vendor's transition from telecoms generalist to specialised expertise in areas such as network virtualisation. IBM announced the launch of its Alpha Zone technology accelerator in Tel Aviv in April 2014, which will recruit start-ups to grow technologies across several areas, including big data, cloud, mobile, security and the internet of things. IBM Israel Country General Manager Rick Kaplan also stated that Alpha Zone could play an important role in supporting IBM's push to develop commercial applications for its Watson supercomputer. IBM will recruit start-ups for 24-week sessions, during which time they will provide office space, mentorship and exposure to investors, while allowing the businesses to retain the rights to their innovations. In February 2014, IBM also announced plans to open a Center of Excellence for Security and Protection of Infrastructure and Assets in collaboration with Ben-Gurion University in Beersheva, Israel. This follows IBM's acquisition of US-Israeli enterprise security firm Trusteer in September 2013. Trusteer's customers reportedly include seven of the top 10 US banks and nine of the top 10 UK banks. The value of the transaction was not revealed, but industry experts estimate that it was in the vicinity of USD1bn. In January 2014, Cisco announced plans to invest tens of millions of dollars into Israeli venture capital fund JVP. The main areas of focus for the fund are digital media, cyber security and storage technologies. The cybersecurity segment of the fund is expected to raise around USD120mn, which will be invested into working with the government and local start-ups to create a cyber-lab. Israeli Start-Ups Attract Global Attention IVC Research Center and KPMG Somekh Chaikin research shows that the eruption of violence between Israel and Gaza between June and August 2014 did not have any impact on capital raising in Israel's high tech sector, which reached a record high of USD3.4bn in 2014, compared to 2.3bn in 2013. Internet and software companies also increased their share of total capital raised in 2014, accounting for 28% and 22% of total investments respectively, compared to 22% and 21% in 2013. The value of investments is also on the rise, as the average investment per company increased from USD3.2mn in 2012 to USD4.9mn in 2014. © Business Monitor International Ltd Page 50 Israel Information Technology Report Q4 2015 India-based IT company Infosys announced in May 2015 that it was revamping its operations in Israel as the company aims to tap the country's start-up ecosystem, ranked among the world's top hubs for emerging technology businesses. For investment in Israel, Infosys has set aside one-quarter of its USD400mn budget. Infosys has been looking to acquire disruptive technologies to resolve new age digital issues faced by customers such as Bank of America and Toyota. In January 2015, Amazon announced that it had agreed to acquire Israeli chipmaker Annapurna Labs, for up to USD370mn. The company will merge with Amazon's cloud computing business, Amazon Web Services, and will form the foundations of a research and development centre in Israel. In the same week, Dropbox announced that it had closed a deal to acquire CloudOn, a developer of mobile productivity tools based in Herzliya, Israel. Rather than acquiring the company for its products, however, Dropbox announced that CloudOn's service will be shut down in March and that its 30 employees will begin working on Dropbox products. The Israeli office will serve as a base for Dropbox's aggressive expansion of its employee base in the country. In July 2014, Qualcomm completed the acquisition of Israeli wireless gigabit chip developer Wilocity. Qualcomm has been working with Wilocity since 2008 to develop high-capacity and high speed chips for smartphones, tablets and other mobile devices. The financial terms of the deal were not reported, but industry experts estimated the value of the acquisition at USD300mn. In March 2014, US-based Palo Alto Networks confirmed the acquisition of privately held, Tel Aviv-based cyber security firm Cyvera. The financial terms of the acquisition were not confirmed, but industry experts expect the total value of the transaction was around USD200mn. Cyvera's software protects businesses from cyber security threats by blocking unknown, zero-day attacks on computers running Windows software. Palo Alto plans to expand the software for Apple computers and mobile devices running Android and iOS. Also in March 2014, US-based Secure Alert announced plans to acquire Israel-based GPS Global Tracking & Surveillance. The transaction was estimated at around USD11mn. The Israeli company specialises in developing technology for locating and tracking people and vehicles. On the back of the acquisition, Secure Alert intends to set up a research and development centre in Israel, following the lead of many global IT firms. Israeli data protection and management firm Varonis Systems launched its IPO on Nasdaq in February 2014. The company raised about USD106mn in the IPO, with a starting price of USD22 on 4.8mn shares. By the end of the first day of trading the company's share price had already doubled to USD44. Despite a © Business Monitor International Ltd Page 51 Israel Information Technology Report Q4 2015 strong start as a public company, by July 2014 Varonis' shares dropped down below their initial USD22 valuation. This may have been related to widening losses in Q114. Chinese Investors Join The Fray In September 2014, Chinese insurance group Ping An Insurance Co. participated in an USD85mn funding round for IronSource, whose technology enables content developers to reach target audiences and monetise their products and services on both desktop and mobile platforms. The company is reported valued at around USD1.6bn and is expected to launch an IPO in 2015. In December, Ping An Ventures announced that it would co-lead a USD27mn investment round for Israeli online trading platform eToro Group. In November 2014, Chinese search engine Baidu executives visited Israel to meet with local startups and in December announced a USD3mn investment in Pixellot, a company that develops video cameras that can be controlled remotely. In January 2015, Alibaba also made its first Israeli tech investment in Visualead, which creates colourful and animated QR codes. Alibaba had already partnered with Visualead for several years, incorporating its QR codes into its Alipay online payment system. Alibaba stated that the lively QR codes have been key to enhancing customer engagement and building up its online-to-offline (O2O) sales strategy. The estimated value of the investment is USD6-9mn. BMI believes Baidu and Alibaba are also likely to follow US and European companies' lead in using their interests in Israeli start-ups as a springboard to launch research and development centres in the country, and benefit from its large pool of highly skilled tech developers. E-Services As part of its modernisation agenda, the government is also pressing ahead with various other strands of its e-government project. Among other initiatives, there has been spending on computers in healthcare and the nationwide paperless court initiative. The e-government programme is leading to increased demand for computers, with the Israeli government reaching a supply agreement with Dell and HP. The government chose Microsoft search technology to power its government services portal, gov.il. In January 2014, the government of Israel announced it had signed a memorandum of understanding (MoU) with Google, which will help the government improve its online services. Under the partnership, Google will promote the development of e-government services in the education, health and welfare sectors in © Business Monitor International Ltd Page 52 Israel Information Technology Report Q4 2015 cooperation with local start-ups. Google planned to do this by sharing its expertise and software in cloud computing and the Android OS with local developers. Israel also signed a MoU with the UK in March 2014 to develop digital services based on open source systems. This is an extension of the two countries' existing relationship in the IT sector, which includes the TeXchange programme which brings Israeli entrepreneurs to London to meet other entrepreneurs, investors and potential customers, and the UK's establishment of a Tech Hub in Israel in 2012. © Business Monitor International Ltd Page 53 Israel Information Technology Report Q4 2015 Regulatory Development Table: IT Regulatory Authorities Government Authority Ministry of Science, Technology and Space Minister Danny Danon Source: BMI The Ministry of Science, Technology and Space has undergone numerous name changes and received its current name in 2013. The ministry's responsibilities include forming a national science and technology policy, coordinating research areas and technological analysis and organisation. The main priorities for the ministry are as follows: ■ Establishing a national policy and priorities for research and development (R&D); ■ Developing scientific and technological infrastructure; ■ Establishing and strengthening foreign scientific relations; ■ Participating in the establishment of research centres, including regional R&D centres; ■ Participating in the development of scientific and technological human resources; ■ Increasing awareness of science within the public, especially the youth of Israel; ■ Developing digital infrastructure (facilitating access to information); ■ Consulting the government and its offices in the area of science and technology. Cybersecurity In January 2014, the National Cyber Bureau announced that it intends to launch a task force which will help consumers and businesses respond to cyberattacks. This cyber emergency response team will provide assistance to individuals and companies that fall victim to cyberattacks, as well as facilitate the sharing of information pertaining to cyber threats. Israeli Prime Minister Benjamin Netanyahu announced in September 2014 that the country would further bolster its cyber defence capabilities with the establishment of a National Cyber Defense Authority (NCDA). The new body will protect civilian cyberspace as well as vital security facilities, in order to © Business Monitor International Ltd Page 54 Israel Information Technology Report Q4 2015 respond to the government's concerns over Iran's enhanced cyber warfare abilities. The NCDA will work in collaboration with the existing Israel National Cyber Bureau. Government Approves FTTH Build In June 2013, a consortium led by Sweden's ViaEuropa won a tender for a fibre optic communications infrastructure joint venture with the Israel Electric Corporation (IEC). The joint venture, 60% owned by the ViaEuropa consortium and 40% owned by the IEC will build, operate and manage the new 25,000km fibre-to-the-home network. The aim is for construction on the multi-billion shekel network to begin before the end of 2013, and for coverage to reach two-thirds of the population by 2020. ViaEuropa will own a 50% share of the consortium, with four Israeli investors - BATM Advanced Communications and Rapac Communications, Tamares Telecom and Bynet Data Communications - each owning a 12.5% share. Table: Government Initiatives Initiative Details Gov@Net Government intranet A cross-government intranet planned to connect more than 80 governmental networks and hundreds of institutes. The implementation will create the largest Israeli IP-VPN. The project will allow efficient internal communication and resource sharing. Mercava Government ERP Mercava is the largest ever IT project implemented in Israel. It will gradually replace the assortment of unique legacy systems currently operating in governmental bodies with a central, unified enterprise resource planning (ERP) system running on SAP system software. This project will create a unified language for cross-government activities. Government EIP This project is intended to promote enterprise portals within the government. Since a cross-government portal will be based on information received from the different bodies, the first step involves the construction of a ministry-level portal. This portal will draw information from Merkava, ministry-specific operational systems and intra-government shared resources. Tehila Government ISP The Government ISP project has been operational since 1998, providing essential infrastructure for publicgovernment communication. To date, 60% of the governmental bodies have voluntarily joined the project. Shoham - Ecommerce infrastructure and service A central e-commerce service allowing citizens and companies to access a uniform interface to carry out a variety of payments and purchases, including the payment of taxes, fees, fines (VAT, vehicle and driving licence fees, traffic fines), and the purchase of tangible goods (government publications). The service processed more than ILS250mn in its first year. Lehava project Group of initiatives to help close digital divide. Source: BMI © Business Monitor International Ltd Page 55 Israel Information Technology Report Q4 2015 Competitive Landscape International Companies Table: Intel Address Matam Bldg 6 PO Box 1659 Matam Industrial Park Haifa HA 31015 Company History Intel Israel was originally founded in Haifa in 1974 and has grown to become one of the most important enterprises in the country. Intel Israel now employs over 9,800 people, making it the country's largest private sector employer. Intel states it invested USD10.5bn in Israel in the decade to 2012, and received USD1.3bn in Israeli government grants. It is estimated Intel accounted for 10% of Israel's total industrial exports in 2012, and one-third of exports to China. Without the contribution of Intel, high-tech exports would have declined by 10% in 2012, according to Intel estimates. Services And Products Intel operates four design centres and two fabrication plants in Israel, including the Fab28 plant at Kiryat Gat, Intel's largest producer of 22nm chips. Intel's Israeli operations have centred on the development and production of microprocessors for desktops, notebooks, mobile devices and workstations. Intel teams also work on connectivity products and security technologies. Milestones for Intel's Israeli operations include the development of the Pentium M microprocessor, in 2003, a major catalyst for the boom in notebook sales, and the Merom in 2006 which helped boost Intel's presence in the server market. The Sandy Bridge and Ivy Bridge family of processors were also designed and manufactured in Israel, with Sandy Bridge becoming the fastest selling product in Intel's history. In late 2014 Intel launched a new Internet of Things (IoT) platform, which aims to simplify the connectivity and security of web solutions, and enable IoT solutions to be customised according to consumer and business needs. Intel has launched a series of hardware and software products based on the new platform. This includes the SkyLake chip, which will enable computers to power up and link to peripheral devices through wireless technology. It is due to launch in 2015 and be available in new laptops by the end of the year. Intel has also partnered with AT&T, Cisco, GE and IBM to promote compatibility and security of its IoT solutions. Company Developments ■ ■ ■ In July 2015, Intel launched a start-up accelerator programme for nurturing and promoting Israeli start-ups, the Intel Ingenuity Partner Program (Intel IPP), through which Intel will provide the startups with an expert mentor and access to several resources in its facilities. In 2014, Intel Capital revealed that it spent USD62mn to support 16 startups, including two Israeli companies: Screenovate Technologies and Stratoscale. Screenovate develops technology enabling users of project video content wirelessly from smartphones and tablets to TV displays. Stratoscale develops data storage infrastructure which will improve efficiency and scalability in the management of data centres. In April 2014, Israeli Economics Minister Naftali Bennett stated that Intel will invest around USD6bn to upgrade its Kiryat Gat chip plant. This is the largest single investment by a foreign company in Israel. The Israeli government approved the plan in September 2014, confirming that it will give Intel a grant of USD300mn over five years. Intel will also be allowed to pay a corporate tax rate of just 5% for a 10-year period. In exchange, Intel will create an additional 1,000 jobs at the chip centre, which currently employs around 2,500 people, by 2023. Source: BMI © Business Monitor International Ltd Page 56 Israel Information Technology Report Q4 2015 Local Companies Table: Amdocs Address 8 Hapnina St Ra'anana 43000 Company History Amdocs was founded in Israel in 1982 as an offshoot of Golden Pages, the business phone directory company. After acquisition by SouthWestern Bell Corporation in 1985 the centre of gravity shifted to the US, but Amdocs maintains development facilities in Israel. It listed on the New York Stock Exchange in 1998 and by 2013 was the market leader in telecommunication billing services, with more than 20,000 employees and services customers in over 50 countries. Services And Products Amdocs provides software and IT services for communications, media and entertainment providers. Its major products - which it develops, implements and manages - include business support systems such as billing, CRM and operations support. It also provides network control products and managed services. In Israel, Amdocs operations centre on the AT&T Foundry innovation centre (one of three globally), opened in 2011, which Amdocs runs in collaboration with AT&T. AT&T development tracks include mHealth, HTML5, co-location services and application programming interfaces. Amdocs also provides managed services to Israeli operator Cellcom and provides support for VAS launches for Pelephone. In December 2014 Amdocs launched a mobile financial services (MFS) product. The platform was developed by MFS specialist company Utiba, which Amdocs acquired in March 2014. The service enables the provision of secure money transfers, bill payments, m-commerce, savings, loans and insurance. In October 2014, Amdocs launched several new products, including a Network Cloud Service Orchestrator, which is a vendor-agnostic solution to activate complex services with virtual network functions (VNFs) from multiple vendors within days, a comparative short time frame. Company Developments ■ ■ ■ ■ ■ In July 2015, Amdocs completed the acquisition of a substantial majority of Comverse's business support systems (BSS) unit for around USD273mn. Amdocs reported revenues of USD3.564bn for its fiscal year ended September 2014, up 6.5% from USD3.346bn in 2013. Net income also increased by 2.4% to USD422mn. During Q314, Amdocs announced contracts with the State Bank of India for mobile financial services, with Liberty Global for its MVNO solution, a network optimisation contract with Vodafone Hutchison Australia, a second wireline transformation project contract with Telefónica Argentina and a customer management contract with VimpelCom's Beeline. In July 2014, Cellcom Israel awarded Amdocs a contract to upgrade its customer relationship management operations. Cellcom has been an Amdocs customer for more than 10 years. In April 2014, Amdocs announced the extension of its contract with US-based carrier Sprint and an upgraded contract for its Convergent Charging and Billing solution with Far EastTone Telecommunications in Taiwan. Source: BMI © Business Monitor International Ltd Page 57 Israel Information Technology Report Q4 2015 Table: Check Point Address 5 Ha'Solelim Street Tel Aviv 67897 Israel Company History Check Point was founded in 1993, and by 2013 had around 2,900 employees worldwide. It has headquarters in Tel Aviv, Israel, and San Carlos in California. Check Point developed one of the first firewall products, and was named firewall market leader in 1996. Its patented Stateful Inspection Technology, on which its first firewall product was built, continues to be the foundation for network security technology in 2013. Check Point was also one the first companies to develop virtual private network products. Services And Products Check Point provides software and combined software and hardware for IT security. The fields in which it operates include network, endpoint, virtualisation, mobile and data security, as well as security management services. Its primary products are enterprise network security, which are deployed on x-86 hardware made by Crossbeam and Hewlett-Packard. Its products are secured with 35 US patents, and a further 19 pending US patents. Check Point products are sold to large enterprises and small- and medium-sized enterprises (SMEs), with 100% of Global 100 companies and 98% of Global 500 companies among its customers. In October 2014 the company launched Check Point Capsule, which is a complete mobile security solution. The solution offers multi-layered security though secure access to work, which separates personal and business data on mobile devices, safe business documents, enabling authorised users to access a protected document from any device, and protection from threats everywhere, across iOS, Android, Windows and MacOS systems. Company Developments ■ ■ ■ ■ ■ Check Point reported a 9% y-o-y increase in total revenue to USD395.3mn in Q215. Revenue growth during the quarter was attributed to the higher demand for the company's datacentre and high-end appliances, and the greater number of large deal signings. The largest share of revenue was contributed by the Americas, accounting for 48% of revenues, followed by Europe (36%) and Asia Pacific, Japan and the Middle East and Africa (16%) In April 2015, Check Point announced its intention to acquire Lacoon Mobile Security. Lacoon develops security apps for iOS and Android and also markets real-time mobile security and intelligence services, Lacoon will help Check Point to build on its Capsule mobile security solutions. In February 2015, Check Point acquired Hyperwise, a company which has developed a CPU-level threat prevention engine that eliminates threats at the preinfection stage. In December 2014, Check Point announced that it had cracked the codes of DirCrypt, a widespread type of ransomware. This will enable individuals and organisations to recover access to blocked files without having to pay a ransom to cyber criminals. In March 2014, Check Point announced a partnership with VMware to make its private cloud security protection solutions interoperable with VMware infrastructure. Check Point again received favourable ratings in Gartner's Magic Quadrant series in 2013. It was positioned in the leaders quadrant for enterprise network firewall for the sixteenth consecutive year, mobile data protection for the seventh consecutive year and unified threat management for the third consecutive year. Source: BMI © Business Monitor International Ltd Page 58 Israel Information Technology Report Q4 2015 Table: Imperva Address 125 Menachem Begin Street Tel-Aviv 67010 Israel Company History Imperva was founded in 2002 with offices in Israel and the US. By 2013 it had over 550 employees with customers across 75 countries including 337 members of the Global 2000 companies and over 250 government agencies and departments. It is growing rapidly by focusing on data centre security. Imperva reports that 94% of compromised data involved servers, but security spending has not traditionally addressed the data centre. Its target is to capture growth as enterprises move more of their security spending to their data centres. Imperva launched an IPO on NASDAQ in 2011, raising USD90mn. Imperva's software was used by more than 2,600 customers in over 75 countries in 2013, including global telecoms operators, US banks and government agencies. Services And Products Imperva develops software and services for the protection of databases and enterprise applications by focusing on data centre security. It sells products including data security, monitoring and web application security globally. In April 2013 Imperva released its latest data centre security product SecureSphere 10.0 which uses the crowd-sourced ThreatRadar Reputation service. Its main verticals include the public sector, healthcare, energy, financial services, insurance, retail and e-commerce. In October 2014, Imperva launched new security hardware products SecureSphere X8510 and SecureSphere X10K, which bring an additional layer of security to physical and virtual data centres and have throughput speeds of 5Gbps and 10Gbps, respectively. It also launched pay-as-you-go pricing for its SecureSphere Web Application Firewall (WAF), which is available on Amazon Web Services Marketplace. In November 2014, Imperva expanded its SecureSphere enterprise security solution to include a real-time solution to protect data assets in Big Data deployments safe, while still easily accessible. SecureSphere Agent for Big Data supports two Hadoop distributions, Cloudera and Hortonworks. Company Developments ■ ■ In July 2015, Imperva and PwC Germany launched a new cyber security solution aimed at protecting cloud based applications such as Microsoft Office365, DropBox or Salesforce. In February 2014, Imperva announced the acquisition of Isreali cloud-based security firms Skyfence, for USD60mn, and Incapsula, for an undisclosed sum. The announcement also coincided with the release of Imperva's SecureSphere Web application firewall for Amazon's cloud-based web services. Source: BMI © Business Monitor International Ltd Page 59 Israel Information Technology Report Q4 2015 Table: Mellanox Address Hakidma 26 Ofer Industrial Park Yokneam Israel 2069200 Company History Mellanox was founded in 1999 and has headquarters in Israel and in Sunnyvale, California. It specialises in the supply of end-to-end InfiniBand and Ethernet interconnect solutions and services for servers and storage. Following three financing rounds of venture capital, with strategic investors including Dell and IBM, Mellanox went public in 2007 with an IPO on NASDAQ, raising USD102mn and valuing the company at more than USD500mn. Since then, Mellanox has acquired networking competitor Voltaire in 2010, chipmaker Kotura and IPtronics in 2013, and connectivity software developer Integrity Project in 2014. Since June 2011, Oracle has held a 10% stake in Mellanox and remains one of its largest customers, along with Chevron, Viacom, JPMorgan and Comcast. Mellanox has regional offices throughout the US and Israel, and in Beijing, Taiwain, Japan and Denmark. Services And Products Company Developments Mellanox's connectivity products are divided along four major categories: adapters, switches, interconnect and software. It also has five main categories of solutions: high performance computing (HPC), datacentre, Web 2.0, big data and cloud. HPC: Covers advanced computation over parallel processing for highly intensive tasks such as climate research, automotive and aerospace design, financial modelling and data mining, among others. Key industry verticals are bioscience, EDA (electronic design automation), manufacturing, media and entertainment, oil and gas, and weather. Datacentre: This segment leverages Mellanox's top performing InfiniBan, Ethernet and RoCE products to deliver high application service levels. This segment encompasses virtualisation and Microsoft-based and scale-out database solutions. Web 2.0: An Infrastructure-as-a-Service (Iaas) for personal and professional use. Big Data: Mellanox adapters, switches, gateways and other products provide the fastest networking solutions to deliver optimum data centre performance for Big Data analytics. CloudX: Enables companies to build their own scalable clouds based on Mellanox's interconnect and off-the-shelf building blocks. ■ Mellanox reported annual revenue of USD463.6mn for 2014, up 18.8% y-o-y. Non-GAAP net income reached USD58.2mn for the year. Source: Mellanox, BMI © Business Monitor International Ltd Page 60 Israel Information Technology Report Q4 2015 Regional Overview Middle East And Africa BMI View: Many markets in the region are starting from a low base and will remain lower spenders than other regions. However, consumers and businesses have embraced technology for a variety of new areas such as banking and retail, cementing the position of ICT at the centre of many daily interactions. Key Features: ■ Diverse region in terms of household incomes, both within and across countries. ■ Overweight in sub-USD1,000 households lacking purchasing power for participation in the devices market. ■ Opportunities weighted towards the handset market due to transition from sub-USD1,000 to USD1,000-5,000 being a more dominant trend in the Middle East and Africa (MEA) than in other regions. MEA is the smallest region in BMI's geographical footprint, with a total of just over 180mn households in 2015, equal to a global share of 9.6%. While it will continue to be significantly smaller than other regions in 2019, we expect it to be the fastest-growing region in terms of total households, which are forecast to reach almost 203mn in 2019. Growth in total households is not however a resilient measure of IT and consumer electronics demand growth in MEA due to its disproportionately high global share of sub-USD1,000 households. BMI considers these households to be external to the devices market due to insufficient purchasing power in global markets. MEA will account for 28.4% of global sub-USD1,000 households in 2015, equal to around 30mn, a figure we forecast will only decline marginally to 28.2mn in 2019. © Business Monitor International Ltd Page 61 Israel Information Technology Report Q4 2015 The Only Way Is Up MEA Change In Households By Income Level ('000), 2015-2019 Source: BMI The low-income bias in the pool of MEA households does however provide vendors with insight for applying targeted strategies across the region. There will be large numbers of households entering the devices market for the first time, with handset sales expected to outperform over the medium term in markets with large growth in the USD1,000-5,000 band including Ghana, Kenya, Nigeria and Uganda where BMI forecasts the addition of a total of almost 10.5mn USD1,000-5,000 households between 2015 and 2019. We expect handset sales to outperform in these markets due to the lower average selling price of devices as compared to PCs and AV devices, while the push factor for acquiring a communication device is emboldened by mobile financial services that are among the global leaders in terms of adoption rates. Nigeria, Egypt and South Africa are also forecast to see significant upward migration of households to the USD5,000-10,000 band. This is a stage of development where we expect demand growth right across the spectrum of retail IT and consumer electronics devices, as households gain additional disposable income and stability. Households may acquire a first PC or flat-screen TV, while at the same time demand will shift from dumb and featurephones to low-and-mid-range smartphones. Margins will remain tight for vendors in © Business Monitor International Ltd Page 62 Israel Information Technology Report Q4 2015 these markets, especially as Asian brands look to continue international expansion, but there may nonetheless be scope for local or regional brands to gain traction among consumers. The primary focus in MEA is the large and emerging African market, but standing in stark contrast are the highly lucrative and premium-oriented Middle East markets of the Gulf Cooperation Council (GCC). Saudi Arabia stands out as the largest market in terms of population, where broader based growth is forecast compared to Qatar and the UAE, which are heavily luxury good-centric and will only become more so over the medium term. Apple is primed to continue its strong run in the GCC, where premium-focused fashiondriven consumers (including large numbers of tourists) have short replacement cycles and a penchant for top-of-the-range smartphones, tablets, TVs and notebooks. © Business Monitor International Ltd Page 63 Israel Information Technology Report Q4 2015 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is essential to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail the population pyramid for 2015, the change in the structure of the population between 2015 and 2050 and the total population between 1990 and 2050. The tables show indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split and life expectancy. Population (1990-2050) 15 10 5 2050f 2045f 2040f 2035f 2030f 2025f 2020f 2015f 2010 2005 2000 1990 0 Israel - Population, mn f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 64 Israel Information Technology Report Q4 2015 Israel Population Pyramid 2015 (LHS) & 2015 Versus 2050 (RHS) Source: World Bank, UN, BMI Table: Population Headline Indicators (Israel 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f 4,499 6,013 6,603 7,420 7,919 8,507 9,071 na 2.1 2.1 2.0 1.2 1.4 1.2 Population, total, male, '000 2,245 2,963 3,258 3,664 3,927 4,229 4,518 Population, total, female, '000 2,253 3,050 3,345 3,755 3,992 4,278 4,552 Population ratio, male/female 1.00 0.97 0.97 0.98 0.98 0.99 0.99 Population, total, '000 Population, % y-o-y na = not available; f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 65 Israel Information Technology Report Q4 2015 Table: Key Population Ratios (Israel 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f 2,693 3,721 4,102 4,624 4,841 5,149 5,531 59.9 61.9 62.1 62.3 61.1 60.5 61.0 1,805 2,291 2,501 2,795 3,078 3,357 3,539 67.0 61.6 61.0 60.4 63.6 65.2 64.0 1,406 1,689 1,839 2,021 2,217 2,314 2,327 Youth population, % of total working age 52.2 45.4 44.8 43.7 45.8 44.9 42.1 Pensionable population, '000 399 602 662 774 860 1,043 1,212 Pensionable population, % of total working age 14.8 16.2 16.1 16.7 17.8 20.3 21.9 Active population, total, '000 Active population, % of total population Dependent population, total, '000 Dependent ratio, % of total working age Youth population, total, '000 f = BMI forecast. Source: World Bank, UN, BMI Table: Urban/Rural Population & Life Expectancy (Israel 1990-2025) 1990 2000 2005 2010e 2015f 2020f 2025f 4,065.4 5,484.7 6,043.6 6,813.6 7,295.9 7,863.1 8,411.5 90.4 91.2 91.5 91.8 92.1 92.4 92.7 433.8 529.0 560.1 606.8 623.6 644.2 659.6 9.6 8.8 8.5 8.2 7.9 7.6 7.3 Life expectancy at birth, male, years 74.6 76.9 78.1 79.3 80.3 81.0 81.7 Life expectancy at birth, female, years 78.3 80.9 82.2 83.1 83.8 84.5 85.2 Life expectancy at birth, average, years 76.4 79.0 80.2 81.3 82.1 82.8 83.5 Urban population, '000 Urban population, % of total Rural population, '000 Rural population, % of total f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 66 Israel Information Technology Report Q4 2015 Table: Population By Age Group (Israel 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, total, '000 482 614 666 735 792 767 767 Population, 5-9 yrs, total, '000 461 547 619 666 754 792 767 Population, 10-14 yrs, total, '000 461 527 553 619 670 754 792 Population, 15-19 yrs, total, '000 429 527 535 564 613 671 755 Population, 20-24 yrs, total, '000 355 513 538 555 564 615 673 Population, 25-29 yrs, total, '000 328 463 522 556 555 566 616 Population, 30-34 yrs, total, '000 314 391 469 546 534 557 568 Population, 35-39 yrs, total, '000 324 370 396 499 529 537 560 Population, 40-44 yrs, total, '000 271 358 375 423 500 531 539 Population, 45-49 yrs, total, '000 188 371 362 390 415 500 530 Population, 50-54 yrs, total, '000 170 315 372 371 387 413 497 Population, 55-59 yrs, total, '000 159 214 315 387 376 384 410 Population, 60-64 yrs, total, '000 150 194 212 328 364 370 379 Population, 65-69 yrs, total, '000 135 184 188 216 269 351 358 Population, 70-74 yrs, total, '000 97 160 169 182 192 252 330 Population, 75-79 yrs, total, '000 87 126 137 160 165 172 227 Population, 80-84 yrs, total, '000 50 73 96 119 115 135 142 Population, 85-89 yrs, total, '000 20 42 46 66 77 79 95 Population, 90-94 yrs, total, '000 6 13 19 21 32 39 42 Population, 95-99 yrs, total, '000 0 2 3 5 6 10 13 Population, 100+ yrs, total, '000 0 0 0 0 0 1 2 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 67 Israel Information Technology Report Q4 2015 Table: Population By Age Group % (Israel 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, % total 10.73 10.21 10.09 9.91 10.01 9.03 8.46 Population, 5-9 yrs, % total 10.26 9.11 9.38 8.98 9.53 9.31 8.46 Population, 10-14 yrs, % total 10.27 8.77 8.39 8.35 8.47 8.87 8.73 Population, 15-19 yrs, % total 9.55 8.78 8.12 7.61 7.74 7.89 8.33 Population, 20-24 yrs, % total 7.90 8.55 8.15 7.49 7.13 7.23 7.42 Population, 25-29 yrs, % total 7.29 7.70 7.92 7.50 7.01 6.66 6.80 Population, 30-34 yrs, % total 7.00 6.51 7.12 7.36 6.74 6.56 6.27 Population, 35-39 yrs, % total 7.22 6.16 6.01 6.74 6.68 6.32 6.18 Population, 40-44 yrs, % total 6.03 5.96 5.68 5.71 6.33 6.25 5.94 Population, 45-49 yrs, % total 4.19 6.17 5.49 5.26 5.25 5.88 5.85 Population, 50-54 yrs, % total 3.80 5.25 5.65 5.01 4.90 4.86 5.49 Population, 55-59 yrs, % total 3.55 3.57 4.77 5.22 4.75 4.53 4.52 Population, 60-64 yrs, % total 3.34 3.24 3.22 4.43 4.60 4.35 4.18 Population, 65-69 yrs, % total 3.02 3.06 2.85 2.92 3.40 4.13 3.95 Population, 70-74 yrs, % total 2.17 2.67 2.57 2.47 2.43 2.97 3.65 Population, 75-79 yrs, % total 1.94 2.11 2.09 2.16 2.09 2.03 2.51 Population, 80-84 yrs, % total 1.13 1.22 1.47 1.61 1.46 1.59 1.57 Population, 85-89 yrs, % total 0.46 0.71 0.70 0.89 0.97 0.94 1.05 Population, 90-94 yrs, % total 0.14 0.22 0.29 0.29 0.41 0.46 0.46 Population, 95-99 yrs, % total 0.02 0.03 0.05 0.07 0.08 0.12 0.15 Population, 100+ yrs, % total 0.00 0.00 0.00 0.01 0.01 0.01 0.02 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 68 Israel Information Technology Report Q4 2015 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. Common to our analysis of every industry is the use of vector autoregressions. They allow us to forecast a variable using more than its own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. We mainly use OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account; ■ Testing the directional movement and magnitude of coefficients; ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); ■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity;. © Business Monitor International Ltd Page 69 Israel Information Technology Report Q4 2015 BMI uses the selected best model to perform forecasting. Human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Sector-Specific Methodology A number of criteria drive our forecasts for each IT variable. IT forecasting is complicated due to the fragmented nature of the market, with little transparency of vendor data and low apparent agreement between many sets of figures in terms of market definition, base and methodology. In addition, forecasts are affected by consideration of a variety of internal and external political and economic factors. Within best-practice techniques of time-series modelling, our quarterly updated forecasts are improved substantially by intimate knowledge of the prevailing features of each local market. Individual variables taken into account in creating each forecast include: ■ Overall economic context, and GDP and demographic trends; ■ Underlying 'information society' trends; ■ Projected GDP share of industry; ■ Maturity of market structure; ■ Regulatory developments and government policies; ■ Developments in key client sectors such as telecommunications, banking and e-government; ■ Technological developments and diffusion rates; ■ Exogenous events. Estimates are calculated using our own macroeconomic and demographic forecasts. Sources Additional sources used in IT reports include national ministries and ICT regulatory bodies, national industry associations, and international industry organisations such as the International Telecommunication © Business Monitor International Ltd Page 70 Israel Information Technology Report Q4 2015 Union (ITU), officially released company results and figures, and international and national industry news agencies. Risk/Reward Index Methodology BMI's Risk/Reward Index (RRI) provide a comparative regional ranking system evaluating the ease of doing business and the industry-specific opportunities and limitations for potential investors in a given market. The RRI system divides into two distinct areas: Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. This is further broken down into two sub categories: ■ Industry Rewards (an industry-specific category taking into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors). • Country Rewards (a country-specific category, factoring in favourable political and economic conditions for the industry). Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period. This is broken down into two sub categories: ■ Industry Risks (an industry-specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry and the relative maturity of a market). • Country Risks (a country-specific category in which political and economic instability, unfavourable legislation and a poor overall business environment are evaluated to provide an overall score). We take a weighted average, combining industry and country risks, or industry and country rewards. These two results in turn provide an overall Risk/Reward Score, which is used to create our regional ranking system for the risks and rewards of involvement in a specific industry in a particular country. For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall Risk/Reward Score a weighted average of the total score. As most of the countries and territories evaluated are considered by BMI to be 'emerging markets', our score is revised on a quarterly basis. This ensures the score draws on the latest information and data across our broad range of sources, and the expertise of our analysts. © Business Monitor International Ltd Page 71 Israel Information Technology Report Q4 2015 Sector-Specific Methodology In constructing these indices, the following indicators have been used. Almost all indicators are objectively based. Table: It Risk/Reward Index Indicators Rationale Rewards Industry IT market value, US$bn Denotes breadth of IT market. Large markets score higher than smaller ones. Sector value growth, % year-on-year (y-o-y) Denotes sector dynamism. Scores based on annual average growth over five-year forecast period. Government initiatives and spending Denotes spending boost provided by public sector, which can be a crucial determinant of sector development. Hardware, % of total sales Denotes maturity of market. A high proportion of hardware sales, compared to services/ software, indicates that the overall IT market is immature. Country Urban-rural split Urbanisation is used as a proxy for development. Mainly rural states score lower. GDP per capita, USD A high GDP per capita supports long-term industry prospects. Overall score for Country Rewards is also affected by the coverage of the power transmission network across the state. Risks Industry Intellectual property (IP) laws Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting. ICT policy Subjective evaluation of official policy towards IT development, as enshrined in statute and tax code. Country Short-term external risk Score from BMI's Country Risk Index (CRI). It evaluates the vulnerability to external shock, which is the principal cause of economic crises. Such a crisis would cut investment. Short-term financial risk Score from CRI, to denote risk of currency crisis and stability of banking sector. The former would hit revenues in hard currency, while the latter would curtail investment funding. Trade bureaucracy Score from CRI to denote ease of trading with the state. Legal framework Score from CRI denotes the strength of legal institutions in each state - security of investment can be a key risk in some emerging markets. Bureaucracy Score from CRI denotes ease of conducting business in the state. Corruption Score from CRI denotes the risk of additional illegal costs/possibility of opacity in tendering/ business operations affecting companies' ability to compete. Source: BMI © Business Monitor International Ltd Page 72 Israel Information Technology Report Q4 2015 Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-components equal weight. The following weighting has been adopted: Table: Weighting Of Components Component Rewards Weighting, % 70, of which - Industry 65 - Country 35 Risks to 30, of which - Industry 40 - Country 60 Source: BMI © Business Monitor International Ltd Page 73 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... Ltd Page 15 Israel Information Technology Report Q4 2015 2015 Outlook BMI forecasts IT market growth of 5.7% in 2015 to a value of ILS23.1bn, but as a result of depreciation we expect a contraction of 3% in US dollar terms Our in-house Country Risk team for Israel forecasts shekel deprecation against the US dollar from an average of ILS3.6/USD in 2014 to ILS3.9/USD in 2015 This will erode Israeli purchasing... demand for cyber and information security solutions World Bank data show that Israel' s military expenditure accounted for © Business Monitor International Ltd Page 18 Israel Information Technology Report Q4 2015 5.6% of GDP in 2013, among the highest in the world, underpinning the IDF's ability to make a major contribution to IT spending in Israel Meanwhile, intensifying competition in Israel' s telecoms... Business Monitor International Ltd Page 21 Israel Information Technology Report Q4 2015 Absence Of 2015 Budget To Create Two Years Of Volatility Israel - Government Final Consumption, Real Growth % chg y-o-y 8 6 4 2 2018f 2017f 2016f 2015f 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 0 f= BMI forecast Source: BMI, Central Bureau of Statistics Due to the absence of a 2015 budget, the new coalition government... market, forecast by BMI for 2015 The low level of per capita spending explains why the large African markets score very close to the GCC markets in terms of Industry Rewards, despite the far larger local populations © Business Monitor International Ltd Page 27 Israel Information Technology Report Q4 2015 IT Spending Per Capita (USD) 2015f 1,000 750 500 250 0 2015f Bahrain Israel United Arab Emirates... businesses a year registered in Israel between 2005 and 2012 © Business Monitor International Ltd Page 19 Israel Information Technology Report Q4 2015 Macroeconomic Forecasts Economic Analysis BMI View: The Israeli economy will see a slight uptick in growth in H215, driven primarily by private consumption, as government expenditure remains capped by the absence of a budget for 2015 From 2016, we expect public... acceleration in GFCF growth, underpin our positive view for the Israeli economy over the next five years: we forecast real GDP growth to average 3.4% over this period © Business Monitor International Ltd Page 20 Israel Information Technology Report Q4 2015 Limited Acceleration Ahead Israel - Real GDP Growth, % 7 6 5 4 3 2 2019f 2018f 2017f 2016f 2015f 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 1 f=... households in Israel in 2015 are middle income, reflected in relatively high levels of per capita spending, but there is also a large premium segment of households with incomes of over USD50,000 (see chart below) © Business Monitor International Ltd Page 17 Israel Information Technology Report Q4 2015 Over the medium term, the most prominent trend will be the migration of mid-market Israeli households... will remain © Business Monitor International Ltd Page 22 Israel Information Technology Report Q4 2015 accommodating in H215 as inflation reaches 1.0% by the end of 2015, the bottom end of the government's target range of 1-3% As a result, the Bank of Israel (BOI) will maintain its policy rate at 0.10% Private Consumption Key Driver Of Growth Israel - Contribution To Real GDP Growth By Expenditure,... due to the activities of the Islamic State in Syria and Iraq poses further risks on Israel' s borders © Business Monitor International Ltd Page 14 Israel Information Technology Report Q4 2015 Industry Forecast Table: IT Industry - Historical Data And Forecasts (Israel 2012-2019) 2012 IT market value, ILSmn 2013 2014e 2015f 2016f 2017f 2018f 2019f 21,506.1 21,095.8 21,823.6 23,076.3 24,218.6 25,177.6... International Ltd Page 29 Israel Information Technology Report Q4 2015 Market Overview BMI View: In the Q41 5 update we undertook a revision of historical data for Israel' s IT market to reflect changes in underlying growth dynamics, primarily resulting in a downgrade to our estimate for PC market value and an increase to IT services sales The revised data now better reflects Israel' s status as a leading