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... International Ltd Page 33 Israel Information Technology Report Q3 2015 Israel PC Browsing Traffic By OS (%) And y-o-y Change (pp) April 2015 Source: Statcounter Vendor Performance The Israeli PC market... However, the outlook for Israeli IT vendors and start-ups remains © Business Monitor International Ltd Page Israel Information Technology Report Q3 2015 strong, as they report strong revenue growth... on Israel' s borders © Business Monitor International Ltd Page 14 Israel Information Technology Report Q3 2015 Industry Forecast IT Market Table: IT Industry - Historical Data And Forecasts (Israel
Q3 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 Q3 2015 INCLUDES 5-YEAR FORECASTS TO 2019 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: April 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 Q3 2015 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................... 9 IT SWOT .................................................................................................................................................. 9 Political ................................................................................................................................................. 11 Economic ............................................................................................................................................... 12 Operational Risk ..................................................................................................................................... 13 Industry Forecast .............................................................................................................. 15 IT Market ............................................................................................................................................... 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 - Q315 ........................................................................................ 26 Table: MEA IT Risk/Reward Index - Q315 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Market Overview ............................................................................................................... 30 Hardware ............................................................................................................................................. 30 Software ............................................................................................................................................... 35 Services ................................................................................................................................................ 39 Industry Trends And Developments ................................................................................ 42 Regulatory Development .................................................................................................. 48 Table: IT Regulatory Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Table: Government Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Competitive Landscape .................................................................................................... 52 International Companies ......................................................................................................................... 52 Table: Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Local Companies ................................................................................................................................... 53 Table: Amdocs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Table: Check Point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Table: Imperva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Table: Mellanox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Company Profile ................................................................................................................ 57 Matrix ................................................................................................................................................... 57 Ness ...................................................................................................................................................... 61 © Business Monitor International Ltd Page 4 Israel Information Technology Report Q3 2015 Hilan ..................................................................................................................................................... 65 Table: Hilan Financial KPIs, 2008-2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Regional Overview ............................................................................................................ 69 Middle East & Africa ............................................................................................................................... 69 Demographic Forecast ..................................................................................................... 72 Table: Population Headline Indicators (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Table: Key Population Ratios (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Table: Urban/Rural Population & Life Expectancy (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Table: Population By Age Group (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Table: Population By Age Group % (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Methodology ...................................................................................................................... 77 Industry Forecast Methodology ................................................................................................................ 77 Sources ................................................................................................................................................ 78 Risk/Reward Index Methodology ............................................................................................................... 79 Table: It Risk/Reward Index Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Table: Weighting Of Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 © Business Monitor International Ltd Page 5 Israel Information Technology Report Q3 2015 BMI Industry View BMI View: Israel's vibrant ICT start-up community and highly skilled tech workers 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. Nevertheless, because of the comparatively high penetration of IT products and services, as well as its small population, Israel's IT market is expected to grow more slowly than most others in the region. Given its geopolitical location and the uptick in violence in the region in 2014 and 2015, we expect spending on cyber security to be a key driver of growth, contributing to software and services' increasing share of IT sales over the five years to 2019. Headline Expenditure Projections Computer Hardware Sales: Forecast to reach ILS9.4bn in 2015, up from ILS9.225bn in 2014. We expect growth to accelerate in 2015, driven by the full launch of 4G mobile networks and ongoing upgrades to the Windows 8 and Windows 10 operating systems. Software Sales: ILS6.414bn in 2015, up 9.3% year-on-year (y-o-y) from ILS5.867bn 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 (CRM), databases and business intelligence. IT Services Sales: We expect IT services sales will continue to outperform the rest of the IT market, reaching ILS8.793bn in 2015, up from ILS8.263bn in 2014. Cyber security services will outperform in terms of growth, but it will be stable sectors such as government and defence that continue to account for the majority of spending. Key Trends And Developments Data from Israel's Office of the Chief Scientist (OCS) show that the high-tech sector declined as a proportion of GDP between 2007 and 2012, a trend which we expect to continue throughout our forecast period, albeit at a more gradual pace. However, the outlook for Israeli IT vendors and start-ups remains © Business Monitor International Ltd Page 7 Israel Information Technology Report Q3 2015 strong, as they report strong revenue growth and continue to attract strategic investment from global IT firms. One particular area of Israel's IT market that has attracted attention in 2015 is content monetisation. 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. In February, 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 its plans. Meanwhile, software download and installation specialist, IronSource, recorded revenue of USD250mn in 2014 and closed a pre-IPO funding round of USD105mn in February, which it will use to fund acquisitions and reportedly values the company at well over USD1bn. Global firms also continue their investment, with Infosys revamping its operations in Israel with a USD100mn budget to invest in or acquire Israeli start-ups, Facebook including Israel-based Magisto's Shot app into Facebook Messenger, 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 NFV (network function virtualisation) software specialist Saguna. One of the main reasons behind these investments is to enable global firms to tap into Israel's highly skilled IT labour force. Israel's Central Bureau of Statistics estimates there were around 145,000 jobs in the ICT services industry at end-2013. The continued entry of global IT firms will add to the number of ICT services jobs, but in a country with a total working age population of 4.8mn in 2014, the pool of skilled workers is limited. It is therefore unlikely the level of investment will remain as high over the longer term, once the most attractive start-ups and experienced tech workers are bought up and hired by global firms. © Business Monitor International Ltd Page 8 Israel Information Technology Report Q3 2015 SWOT IT SWOT 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 FTTH 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 ■ Cyber security 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 and ultrabooks. ■ 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 Q3 2015 SWOT - Continued Threats ■ Government austerity measures will dampen consumer and business spending. ■ Intensifying regional tensions could increase operational risk. ■ The weaker local currency, and aggressive pricing, may continue to constrain growth and put pressure on margins. ■ Limited size of workforce could curb attractiveness as an R&D hub over the longer term. © Business Monitor International Ltd Page 10 Israel Information Technology Report Q3 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. 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. Opportunities ■ With the civil war in Syria continuing, risks of a spill over into Israel are ever-present. ■ 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. © Business Monitor International Ltd Page 11 Israel Information Technology Report Q3 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 discovery of large offshore gas deposit will bring an influx in foreign investment 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. © Business Monitor International Ltd Page 12 Israel Information Technology Report Q3 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 Israeli and Arab areas, limiting the number of highly skilled 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. Threats ■ International efforts to find a resolution to the Israeli-Palestinian conflict will continue. ■ The unionisation of the workforce means that there is a high risk of strikes and labour disputes disrupting business activity. © Business Monitor International Ltd Page 13 Israel Information Technology Report Q3 2015 SWOT Analysis - Continued ■ 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 Q3 2015 Industry Forecast IT Market Table: IT Industry - Historical Data And Forecasts (Israel 2012-2019) 2012e IT market value, ILSmn 2013e 2014e 2015f 2016f 2017f 2018f 2019f 22,299.5 22,576.0 23,354.8 24,607.9 26,490.5 27,698.4 28,895.0 30,073.9 Computer hardware sales, ILSmn 9,388.1 9,143.3 9,225.2 9,400.2 9,801.5 10,082.2 10,113.2 Personal computer sales, ILSmn 7,895.4 7,753.5 7,869.1 8,065.4 8,517.5 8,821.9 8,909.8 8,963.0 Software sales, ILSmn 5,177.2 5,524.3 5,866.6 6,414.2 7,128.1 7,520.4 8,146.5 8,792.5 Services sales, ILSmn 7,734.2 7,908.4 8,263.1 8,793.5 9,560.9 10,095.8 10,635.2 11,176.6 2.2 2.2 2.2 2.2 IT market value, % of GDP 2.2 2.2 10,104.8 2.1 2.1 e/f = BMI estimate/forecast. Source: BMI We continue to hold the view that the Israeli IT market will experience slow and steady growth over the medium term and gradually decline as a percentage of GDP. This is a product of saturation of the hardware and software/services market and price competition between vendors, which will hold down the overall value of the market. Nevertheless, Israel remains at the forefront of development of security services and continues to attract investment in research and development centres from global IT firms. This chimes with data published by the Office of the Chief Scientist (OCS), which shows that although 2014 was a record year for exits in the technology sector, either through IPOs or being acquired, reaching USD6.9bn, hi-tech has declined as a share of total GDP from a peak of nearly 13% in 2007 to 11.5% by 2012 (latest data available). We estimate the IT market to reach a value of ILS23.355bn in 2014, equal to USD6.528bn and up from ILS22.6bn in 2013. Despite our expectations of relatively weak growth in 2013 and 2014, we maintain a more positive outlook for Israel's IT market over the long term, propelled by the country's improving macroeconomic outlook. Israel remains a robust IT market with plenty of opportunities across industrial, government, defence, financial services and telecoms spending. Our five-year compound annual growth rate sees growth around 4.1% in Israeli new shekel terms for the period from 2015-2019. We expect IT software will be the fastest growing segment of the IT market, slightly ahead of services, 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 © Business Monitor International Ltd Page 15 Israel Information Technology Report Q3 2015 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. 2015 Outlook We project real GDP growth of 3.1% in Israel in 2015, an improvement on a slight economic downturn in 2013. BMI's Country Risk team downgraded Israel's growth forecast slightly in the wake of the violence between Israel and Gaza, but does not expect the events to have a lasting negative impact on the economy. Over the remaining years to 2019, we expect slow but steady acceleration in the economy, with average annual GDP growth of 3.5%. This trend will pick up over the longer term as gas resources currently under development come online from 2019. BMI also forecasts underwhelming expansion of private consumption growth at 3.5% in 2015. 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 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. © Business Monitor International Ltd Page 16 Israel Information Technology Report Q3 2015 Industry Trends - IT Market 2012-2019 40,000 3 30,000 2.5 20,000 2 10,000 1.5 0 1 2012 2013 2014e 2015f IT market value, ILSmn 2016f 2017f 2018f 2019f IT market value, % of GDP e/f = BMI estimate/forecast. Source: BMI In the hardware segment, household computer penetration of more than 75% offers only 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. Per capita IT spending is expected to reach from ILS3,107 in 2015 and rise to ILS3,585 by 2019. However, spending will fail to keep pace with GDP growth in Israel as the economy becomes less heavily weighted towards the high-tech sector following gas exploration and growth in other sectors. © Business Monitor International Ltd Page 17 Israel Information Technology Report Q3 2015 Income Per Capita Breakdown (2012-2019) 100,000 75,000 50,000 25,000 0 2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f Poorest 20%, net income per capita, ILS Richest 20%, net income per capita, ILS Middle 60% of population, net income per capita, ILS e/f = BMI estimate/forecast. Source: BMI, National Sources Still, 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. Cloud computing is expected to be a source of revenue growth over the medium term as organisations looking for efficiencies turn to more flexible and affordable Software-as-a-Service and Infrastructure-as-aService. 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. While large organisations still dominate, 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 ondemand 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 18 Israel Information Technology Report Q3 2015 Summary BMI believes IT spending has sufficient strength in key demand verticals to maintain a positive trajectory over the medium term. However, we do not expect growth to keep pace with GDP as market saturation and price competition between vendors limit increases in the total value of the market. The hardware market is forecast to grow from ILS9.4bn in 2015 to ILS10.1bn in 2019, with PC sales projected to rise from an estimated ILS8.1bn to ILS9.0bn. While growth will remain strong, the market will be increasingly dominated by IT service sales and software sales, indicating the maturity of the market. BMI forecasts software sales to account for 29.2% of Israel's IT market by 2019, up from 25.1% in 2014, while services are forecast to rise from 35.4% of the IT market to 37.2% over the same timeframe. © Business Monitor International Ltd Page 19 Israel Information Technology Report Q3 2015 Macroeconomic Forecasts Economic Analysis BMI View: We forecast real GDP growth of 3.1% and 3.4% in Israel in 2015 and 2016 respectively, from 2.6% in 2014. A pickup in fixed capital formation - the result of low base effects - will be the main growth driver this year as private and government consumption slow slightly. Beyond 2015, a moderation of austerity policies and increasing exports underpin our relatively bullish medium-term outlook for the economy. Economic growth in Israel will pick up marginally in 2015 and beyond but will remain below the 10-year average. The uptick will be mostly on the back of an increase in fixed capital formation as a result of low base effects and record low interest rates. Economic growth rebounded to an annualised 7.2% quarter-onquarter (q-o-q) in Q414, following 0.6% growth in Q314 when the conflict with Islamist group Hamas in the Gaza Strip occurred. We believe that the impact, and rebound, from the Gaza conflict has almost fully taken place and thus growth will return to a more stable trajectory in the coming quarters. We forecast real GDP growth of 3.1% and 3.4% in Israel in 2015 and 2016 respectively, from 2.6% in 2014 A moderation of austerity policies over the coming years, coupled with increasing exports and a subsequent acceleration in fixed investment growth, underpin our positive view for the Israeli economy over the next five years, and we forecast real GDP growth to average 3.6% over this period. © Business Monitor International Ltd Page 20 Israel Information Technology Report Q3 2015 Picking Up, But Still Below Par Israel - Real GDP Growth (%) 8 6 4 2 2019f 2018f 2017f 2016f 2015f 2014e 2013 2012 2011 2010 2009 2008 2007 2006 2005 0 e/f = BMI estimate/forecast. Source: CBS, BMI Expenditure Breakdown Private Consumption Outlook: We expect consumer spending to hold up relatively well in the near term and highlight three factors that will bolster household spending over the coming quarters. First, inflation will remain subdued, averaging 0.9% over 2015, particularly with global oil prices having taken a sharp downturn in recent months. Second, unemployment remains near all-time lows. The joblessness rate came in at 5.4% in December 2014, compared with an average of 6.0% over the first 11 months of the year. Finally, both fiscal and monetary policy remain in expansionary mode, with tax cuts and public sector wage hikes having been implemented last year and the Bank of Israel's benchmark interest rate down to 0.10% in February. We forecast private consumption growth of 3.1% and 3.4% in 2015 and 2016 respectively, compared with 2.8% last year. © Business Monitor International Ltd Page 21 Israel Information Technology Report Q3 2015 One-Off Jump Israel - Real GDP, % chg q-o-q (annualised) Source: BMI, Central Bureau of Statistics Government Spending Outlook: The government's tight fiscal policy will lead to a slowdown in spending on health, education and public services in 2015; however, opposition to austerity as well as the election will mean the decrease is relatively small. We forecast government consumption to expand by 3.5% and 3.0% in 2015 and 2016, from 3.9% in 2014 (see 'Deficit To Shrink Gradually' February 20). Our Pharmaceuticals research team believes that public spending on health will continue to increase over the coming years. Indeed, the 2015 budget will see a ILS2.8bn (USD734mn) uptick in funding for the healthcare sector, the second largest increase after defence. © Business Monitor International Ltd Page 22 Israel Information Technology Report Q3 2015 No Trend Reversal Israel - Bank Hapoalim Purchasing Managers' Index Source: BMI, Bank Hapoalim Fixed Investment Outlook: Gross fixed capital formation (GFCF) will rebound in 2015 on the back of low base effects and near-zero interest rates. GFCF contracted by 2.0% in 2014, mostly due to the conflict with Hamas over the summer, and thus there is room for a rebound. However, the uptick will be limited as concerns remain over the state of the housing market, and with house price inflation having slowed to 0.1% year-on-year in December - down from an average of 3.5% over the past three years - residential construction is likely to slow significantly. There is also a risk that state capital spending will head lower as pressure on the government to narrow the fiscal deficit increases. The five-year outlook for gross fixed capital formation is encouraging, particularly given prospects for increasing investment in the energy industry. In the middle of November 2014, Israel-based Delek Drilling outlined a major upgrade programme for the Tamar gas field. The development plan is linked to a letter of intent signed between Delek and Spanish gas and electricity company Union Fenosa Gas (UFG) in May 2014 for the supply of 70bn cubic metres (bcm) of gas over 15 years to Egypt's Damietta LNG terminal. The Tamar upgrade plan is estimated to cost between USD1.5bn and USD2bn, with a target of nearly © Business Monitor International Ltd Page 23 Israel Information Technology Report Q3 2015 doubling production capacity to 20bcm once complete. We project fixed investment to contract by 1.5% in 2014 and expand by 4.0% in 2015, and to grow by 4.5% on average over the next five years. Investment Opportunities Lie Ahead Israel - Gas Production (bcm) 25 20 15 10 5 Dry natural gas production, bcm 2024f 2023f 2022f 2021f 2020f 2019f 2018f 2017f 2016f 2015f 2014e 2013 0 Dry natural gas net exports, bcm EIA/BMI Net Exports: We see Israel recording net export deficits of ILS3.7bn and ILS4.5bn in 2015 and 2016 respectively, from a ILS1.2bn surplus in 2014. Exports expanded by 2.8% in Q314 due to a weakening shekel - which lost 14.1% of its value since the beginning of August 2014 - from a sharp drop in the previous quarter. We expect total exports to expand by 2.0% in 2015, primarily as the shekel will remain weak relative to levels seen in H114. A gradual improvement in macroeconomic conditions in the UK, Belgium, the Netherlands and Germany - which accounted for 45.2% of total Israeli exports in 2013 - will also support a return to export growth. Import growth will outpace export growth over the next few years. Total imports expanded by 16.2% in Q314, from a 5.5% decline in Q214; we project this component to expand by 1.5% this year and 3.5% in the next on the back of an uptick in domestic consumption and fixed investment. © Business Monitor International Ltd Page 24 Israel Information Technology Report Q3 2015 Table: Economic Activity (Israel 2010-2019) Nominal GDP, USDbn Real GDP growth, % y-o-y GDP per capita, USD 2010 2011 2012e 2013e 2014e 2015f 2016f 2017f 2018f 2019f 233.3 258.4 257.3 290.6 302.8 296.6 316.5 344.7 367.7 392.2 5.8 4.2 3.0 3.2 2.6 3.1 3.4 3.5 3.9 3.7 31,438 34,261 33,664 37,584 38,714 37,446 39,423 42,324 44,477 46,760 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 19.4 7.4 -2.4 -4.0 2.9 3.9 5.0 5.8 6.0 Unemployment, % of labour force, eop 6.6 5.4 6.7 5.9 5.6 5.8 6.0 6.0 6.0 6.0 e/f = estimate/forecast. Source: National sources, BMI © Business Monitor International Ltd Page 25 Israel Information Technology Report Q3 2015 Industry Risk Reward Index Middle East And Africa Risk/Reward Index - Q315 There has been some shuffling in the rankings in this quarter's update to the Middle East and Africa (MEA) IT Risk/Reward Index (RRI), though no country has dropped out of a top five or top 10 position. Israel held its spot at the top, reflecting its mature IT software and services market, wealthy consumer base and stable political environment. The UAE pulled ahead of Qatar into second place, as its more diversified economy compared to other GCC peers has mitigated any impact of lower oil prices on government, enterprise and consumer demand for services. Nigeria was the biggest loser this quarter, falling from seventh to ninth place, as BMI's Country Risk team made a sharp downward revision to our GDP growth outlook, from 5.6% to 3.9% for 2015, given its reliance on oil exports for around 70% of government revenue. This will constrain the government's ability to spend on IT, even though we expect the wider ICT sector to remain an important element in the government's plan to boost economic inclusion and development over the next five years. Ghana also posted a further decline in its score this quarter, falling below Lebanon into twelfth place on our RRI table, as the Cedi's depreciation again gathered speed in the run-up to an IMF agreement in early April, a trend which we expect to continue throughout 2015 as Ghana's current account deficit widens. 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. Our Country Rewards rating 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. © Business Monitor International Ltd Page 26 Israel Information Technology Report Q3 2015 Macro And Political Headwinds Take Their Toll Quarterly And Annual Change To IT RRI Scores (points), Q315 Source: BMI A comparison on year-on-year (y-o-y) and quarter-on-quarter (q-o-q) change to each country's overall IT score in the Q315 update shows that the IT growth outlook and wider business environment for most markets have worsened over the last three to 12 months. Both on a quarterly and an annual basis, there have been no changes to any country's Industry Risks score and only minor changes in the Country Rewards category. For all five African countries in our index, as well as Kuwait, Qatar and Lebanon, the Industry Rewards score is the prime source of the drag on their IT scores over the last year. For the most part, this is owing to the slowdown in GDP growth brought about by lower commodity prices, as mentioned above for Nigeria. Kenya, as a net oil importer, is the exception to this norm and instead benefits from lower prices, which drove up its Country Reward score and resulted in its strong q-o-q gains. The big y-o-y drop in Kenya's score meanwhile reflects a downgrade to its IT growth forecast when the government abandoned its school laptop programme earlier in 2015. Another issue of electricity shortages continues to plague Sub-Saharan Africa (SSA), and in South Africa in particular BMI's Country Risk team made a downward revision to our short-term GDP growth forecast © Business Monitor International Ltd Page 27 Israel Information Technology Report Q3 2015 owing to the negative impact of rolling blackouts on most industries. This has a direct impact on the IT sector, through the additional cost of alternative energy solutions, and an indirect one, as customers across other industries divert spending from IT to more critical electricity solutions. Nevertheless, the maturity of South Africa's IT sector and ongoing investments in fibre broadband networks in key business districts mean it remains by far the most attractive market in SSA. For Kuwait and Qatar, the slump is owing to slight downward revisions to our IT forecasts for the two countries, in light of lower oil prices and some tightening of budgets across various sectors. But they both remain within our top five for the region and are important markets to IT firms aiming to establish themselves across the GCC. This is illustrated by Avaya and IBM opening new offices in Qatar and Kuwait, respectively, in April 2015. With the exception of Qatar and Kuwait, Middle Eastern countries' scores showed an opposite pattern to their African counterparts. The UAE, Saudi Arabia, Bahrain and Israel recorded net y-o-y gains in the Industry Rewards category, as their governments and enterprises continue to invest in modernising their IT systems. For example Saudi Arabia's Justice Ministry deployed a Symantec data recovery solution and the UAE's Al-Futtaim Group implemented the SAP Ariba solution in April 2015, while Bahrain's Ministry of Health selected Azimuth to implement a new Enterprise Asset Management solution to improve staff and patient safety services. Smart city initiatives are also beginning to gather speed in the region; since the beginning of 2015, Msheireb Properties signed a smart city agreement with MEEZA, Etisalat and Huawei established a partnership on M2M and IoT and Cisco was selected to consult Dubai Design District on its smart city project, where it aims to roll out 130 initiatives across at least 11 new buildings. However all six GCC countries recorded losses in the Country Risks segment, as external risks relating to rising regional tensions threaten stability. The proxy war unfolding between Saudi Arabia and Iran in Yemen, with tensions also spreading into Bahrain and the rest of the region, too, is the main source of the declining scores. Saudi Arabia's sharp q-o-q loss reflects further political uncertainty, as new ruler King Salman bin Abdulaziz reshuffles the country's top leadership, in a move that strays from traditional succession policies. Nevertheless, the heavier weighting towards Industry Rewards compared to Country Risks in our index means that the UAE, Bahrain and Saudi Arabia were able to record y-o-y gains, despite rising external risks. By contrast, with losses across both categories, Qatar and Kuwait were the Middle East's underperformers over the last 12 months. © Business Monitor International Ltd Page 28 Israel Information Technology Report Q3 2015 Table: MEA IT Risk/Reward Index - Q315 Industry Rewards Country Rewards Industry Risks Country Risks IT Rating Rank Previous Rank Israel 55.0 100.0 65.0 68.2 69.6 1 1 UAE 57.5 90.0 60.0 64.0 66.9 2 3 Qatar 50.8 100.0 55.0 62.5 65.5 3 2 Saudi Arabia 52.5 75.0 55.0 58.7 59.4 4 5 Kuwait 40.8 100.0 40.0 60.5 58.8 5 4 Bahrain 31.7 85.0 57.5 55.3 52.1 6 6 South Africa 55.0 45.0 45.0 58.2 51.9 7 8 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 7 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 38.3 35.0 40.0 51.1 40.0 12 11 Kenya 41.7 10.0 55.0 36.6 34.6 13 13 Average 45.0 63.8 48.8 54.4 51.8 Scores out of 100, with 100 the highest. The IT Risk/Reward Rating comprises two sub-ratings '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' rating evaluates the size and growth potential of an IT market in any given state, and country's broader economic/socio-demographic characteristics that affect the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's Country Risk Ratings, that could affect the realisation of anticipated returns. Source: BMI © Business Monitor International Ltd Page 29 Israel Information Technology Report Q3 2015 Market Overview Hardware BMI estimates Israel's IT hardware market returned to positive growth in 2014, up 0.1% year-on-year (y-oy) to ILS9.225bn. We forecast positive, albeit slow growth with a compound annual growth rate (CAGR) of 1.5% over our five-year forecast from 2015 to 2019. In 2013 the value of hardware sales was squeezed by a weaker currency, price competition and the lower unit price of mid-range tablets hitting the market. Helped by an acceleration in private consumption growth, BMI believes that increased take-up of tablets and the end of support to older Windows operating systems boosted sales in 2014. Israel's growing attraction as an IT research and development hub to international firms and its expertise in cyber security 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. However, BMI forecasts Israel's real GDP growth return to positive territory in 2015, reaching real growth of 3.1%, and to outperform its developed market peers in the eurozone and the regional outlook for the Middle East over the five years to 2019. Growth will primarily be driven by fixed investment, with net exports ticking up toward the end of the forecast period as gas resources come online. During 2015, we also expect continued modest growth in private consumption, at 3.5%. Paired with lower average prices for devices, we forecast stronger but still modest growth in the hardware segment in 2015, continuing its recovery from a slump in 2013. The Israeli government has launched various initiatives to increase computer and internet penetration, such as Computer for Every Child, now morphing into 'Tablet for Every Child' according to Israeli Prime Minister Binyamin 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. © Business Monitor International Ltd Page 30 Israel Information Technology Report Q3 2015 Therefore, BMI expects upgrades to new systems, Israel's vibrant local start-up and IT research & development 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, we believe demand strengthened from 2014, further supported by an improving private consumption outlook. Meanwhile, the end of all support for Windows XP in April 2014 and of mainstream support for Windows 7 in January 2015 is expected to result in higher sales of the Windows 8 OS in the retail and enterprise markets. In the retail market Windows 8 will deepen the tablet and hybrid PC markets, while in the enterprise sector the new OS should trigger computer hardware tenders previously delayed because of weakened economic growth. Hardware Market (2012-2019) 10,000 7,500 5,000 2,500 0 2012e 2013e 2014e 2015f Personal computer sales, ILSmn 2016f 2017f 2018f 2019f Servers sales, ILSmn e/f = BMI estimate/forecast. Source: BMI © Business Monitor International Ltd Page 31 Israel Information Technology Report Q3 2015 Evolving Form Factors The Israeli IT market is relatively mature, but BMI estimates that hardware still accounted for 39.5% of the total market in 2014 (excluding communications hardware). As the market continues to mature, we expect this to drop to around 33.6% by 2019. 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. BMI estimates that notebooks and tablets accounted for 78% of total PC sales in Israel in 2014, up from 60% in 2009. 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 throughout 2013 and 2014. Data from Statcounter show that iOS, run on Apple's tablets, accounted for 73.3% of all tablet browsing traffic in Israel in April 2015. This was down by just 2 percentage points (pp) y-o-y, though largely unchanged since July 2014. Android accounted for most of the rest of tablet browsing traffic, with a share of 28.6% in April 2015 (up by 4.4ppts y-o-y), but having made little gains since mid-2014. Windows 8 had only a tiny share of tablet browsing traffic of 0.7% in April 2015. 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. Household spending per capita in Israel was ILS56,571 (USD15,936) in 2014, the highest in the Middle East region according to BMI data. 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 13.5% of browsing market share in April 2015, up by around 3ppts y-o-y. Asus claimed a 4.4% share, Google (LG Nexus) a 2.5% share and all other players claimed less than 1% share each, according to Statcounter. The gap between the strategies of some of the © Business Monitor International Ltd Page 32 Israel Information Technology Report Q3 2015 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 April 2015 (this is nevertheless up from 2.8% and 0.9% of browsing traffic a year earlier). 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 17.2% of total PC browsing traffic, while Windows XP has declined steadily and by April accounted for just 10.4% of browsing traffic. Although Windows will soon release Windows 10, Windows 7 still remains by far the most common OS in Israel, accounting for 61.2% of browsing traffic in April 2015, down by barely 1ppts y-o-y. 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 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 to 1, indicating that consumers are beginning to embrace the new form factor. © Business Monitor International Ltd Page 33 Israel Information Technology Report Q3 2015 Israel PC Browsing Traffic By OS (%) And y-o-y Change (pp) April 2015 Source: Statcounter Vendor Performance 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. Most PC market growth in 2012 was driven by the mobile PC segment, and in fact notebook sales declined and growth was solely driven by tablets according to research from IDC. IDC's data for 2012 show that laptop sales declined 16.4% from 2011 to 2012, falling to around 427,000, in contrast to a 20.2% increase in tablet sales to around 226,000. In the laptop market Lenovo leapt to top spot with a market share of 21.2%, overtaking HP and Dell. In second position was Asus with 16% market share, also overtaking HP and Dell which both had 15.2% market share in 2012. 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. © Business Monitor International Ltd Page 34 Israel Information Technology Report Q3 2015 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 research and development (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 ILS5.87bn in 2014, up 6.2% y-o-y. We expect growth in the software segment to accelerate, with a CAGR forecast of around 6.5% over the five years to 2019. In the past few years, there has been a pick-up in demand for systems and upgrades in public and private sectors, with investments by government organisations such as the Israeli Ministry of Defense and Israeli Police, and from utilities leader Israel Electric Company. Much of this growth is related to increasing use of cloud services and related rising demand for security services. 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 (see Matrix Company Profile for further details). 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. 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 © Business Monitor International Ltd Page 35 Israel Information Technology Report Q3 2015 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 steadily, with reviving or emerging areas of opportunity including security, customer relationship management (CRM) solutions and business intelligence. Software Market (2012-2019) 10,000 7,500 5,000 2,500 0 2012e 2013e 2014e 2015f 2016f 2017f 2018f 2019f Software sales, mn e/f = BMI estimate/forecast. Source: BMI Migrations to the Windows 8 operating system are believed to have had a positive impact on 2013 and 2014 sales. Following several upgrades to the Surface Pro, in January 2015 Microsoft announced the Surface Hub, an 84- or 55-inch multi-touch and multi-pen 4K wall mounted screen device, aimed at business users, and which will run the newest Windows 10 OS. 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. In May 2013, Arad Group, a world leader in water meter technology, announced a partnership with IBM to help customers and water utilities manage © Business Monitor International Ltd Page 36 Israel Information Technology Report Q3 2015 resources more efficiently through use of big data and analytics technology. The analytics technology was developed by IBM in Israel. 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. In October 2012 Israel's Prime Minister Binyamin Netanyahu announced that the government was working to create a 'digital Iron Dome' to protect vital infrastructure from hackers and viruses (the Iron Dome is Israel's anti-rocket defence system). This included the establishment of the National Cyber Bureau to defend the nation against computer terrorism. This policy should see vendors win public contracts, while also serving to focus the minds in the private sector, although at the time of writing no major contracts had been publicly announced. In October 2014, Netanyahu announced further plans to establish a National Cyber Defense Authority, which will protect civilian cyberspace as well as vital security facilities. Due to its sensitive geopolitical position and supported by its well-educated population, Israel has a vibrant domestic cyber security 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 incoming traffic and identify possible bugs. Incapsula was established in 2009, created by three Imperva employees. 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 cyber security 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 © Business Monitor International Ltd Page 37 Israel Information Technology Report Q3 2015 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. 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. More recently, 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 cyber attacks. Palo Alto did not confirm the value of the transaction, but industry experts estimated it at around USD200mn. Meanwhile, 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. 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. 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 © Business Monitor International Ltd Page 38 Israel Information Technology Report Q3 2015 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. Services The IT services segment is estimated to have reached a value of ILS8.26bn in 2014. BMI forecasts this to continue expanding at a CAGR of 4.9% over the next five years to reach ILS11.18bn 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 TeamMalam, 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. © Business Monitor International Ltd Page 39 Israel Information Technology Report Q3 2015 IT Services Market (2012-2019) 15,000 20 15 10,000 10 5,000 5 0 0 2012e 2013e 2014e 2015f 2016f 2017f 2018f 2019f Services sales, ILSmn (LHS) Cloud computing spending, % of IT market (RHS) 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 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. One potential demand driver will be organisations looking for help to utilise efficiencies from cloud computing, such as SaaS and infrastructure-as-a-service (IaaS). In 2011, vendors such as Alcatel-Lucent have continued to invest in new cloud computing facilities in Israel, leveraging the country's expertise. 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 managed services among SMEs, which are keen to leverage the operational efficiencies offered by SaaS and IaaS solutions. © Business Monitor International Ltd Page 40 Israel Information Technology Report Q3 2015 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 41 Israel Information Technology Report Q3 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 42 Israel Information Technology Report Q3 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 February 2013 Intel Israel reported its exports more than doubled to USD4.6bn in 2012, from USD2.2bn in 2011. Over the same period Intel's Israeli workforce increased 10% to 8,500, as over the course of 2012 it invested USD1.1bn in Israel. Intel Israel says Intel Corporation has invested USD10.5bn in Israel over the past decade, and received USD1.3bn in Israeli government grants. It is estimated Intel accounts for 10% of Israel's total industrial exports, and one third of exports to China. Without the contribution of Intel, hightech exports would have declined by 10% in 2012, according to the company's own estimates. Israel As A Global Research And Innovation Hub 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 R&D base in the country over time. Also in October, Spanish telecoms company Telefónica teamed up with Israel-based Van Leer Xenia Ventures (VLX Ventures) 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 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. In April 2014, IBM announced the launch of its Alpha Zone technology accelerator in Tel Aviv, which will recruit start-ups to grow technologies across several areas, including big data, cloud, mobile, security and the Internet of Things. IBM Israel's Country General Manager, Rick Kaplan, also stated that Alpha Zone © Business Monitor International Ltd Page 43 Israel Information Technology Report Q3 2015 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 cyber security 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. 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 © Business Monitor International Ltd Page 44 Israel Information Technology Report Q3 2015 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. In February 2014, Israeli data protection and management firm Varonis Systems launched its initial public offering (IPO) on Nasdaq. 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 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. In June 2013, Google acquired Israeli live mapping service Waze for USD966mn. Google intends to integrate Waze's traffic features and crowd-sourced data into its Google Maps platform. In June and August 2013, the US Fair Trade Commission (FTC) and the UK Office of Fair Trading (OFT) both undertook investigations on whether the acquisition posed a threat to competition in the navigation applications segment. The two agencies approved the merger in October and November 2013, respectively. In March 2013 CA Technologies agreed to purchase Israeli app deployment and management company Nolio for USD40-42mn. Nolio provides software that automates application deployment and allows IT staff to maintain, manage and recover these enterprise applications. Chinese Investors Join The Fray In September 2014 Chinese insurance group Ping An Insurance Co. participated in a 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 © Business Monitor International Ltd Page 45 Israel Information Technology Report Q3 2015 around USD1.6bn and is expected to launch an IPO in 2015. Meanwhile, 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 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 46 Israel Information Technology Report Q3 2015 In 2012, Israel's Ministry of Finance launched a major new project 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, including pension plans. The project was awarded to local company Ness Technologies, which will establish a dedicated subsidiary to develop and operate the National Exchange, including a service and support centre. When the system comes online, officials expect it to provide a boost to the economy, when hundreds of millions of shekels are freed up as pension holders claim what is theirs. © Business Monitor International Ltd Page 47 Israel Information Technology Report Q3 2015 Regulatory Development Table: IT Regulatory Authorities Government Authority Ministry of Science, Technology and Space Minister Yaakov Peri 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. Cyber Security In October 2012 Israel's Prime Minister Benjamin Netanyahu announced the government was working to create a 'digital Iron Dome' to protect vital infrastructure from hackers and viruses (the Iron Dome is Israel's anti-rocket defence system). This includes the establishment of the National Cyber Bureau to defend the nation against computer terrorism. The announcement follows a series of cyber attacks linked to political tensions in the Middle East, including attacks on Israeli institutions, as well as Saudi oil companies and banks in the UAE. In January 2013 Netanyahu opened a national programme to train teenagers in the skills of cyber security. The programme accepts high achieving students for a three-year training programme to intercept malicious © Business Monitor International Ltd Page 48 Israel Information Technology Report Q3 2015 attacks. The government is hoping the programme will deliver the skilled professionals needed to meet escalating cyber threats in the region and globally. In January 2014, the National Cyber Bureau announced that it intends to launch a task force which will help consumers and businesses respond to cyber attacks. This cyber emergency response team will provide assistance to individuals and companies that fall victim to cyber attacks, as well as facilitate the sharing of information pertaining to cyber threats. Israeli Prime Minister Binyamin 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 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 January 2013 Israel's government agreed to allow a consortium of privately owned companies to join forces with the state electricity utility to begin building the country's first alternative next-generation fibreoptic backbone. The roll-out should increase competition in high-speed internet access and lower prices opening up new opportunities for IT vendors in terms of devices sales and services to consumers. 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 (FTTH) 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. Government To Invest In Dual-Use R&D In January 2013 the Ministry of Finance, Ministry of Defence and Ministry of Industry, Trade and Labour announced a joint budget of ILS30mn for R&D for technologies with civilian and military applications. Each ministry contributes one-third of the funds to the programme. The programme has already identified 17 projects of potential dual-use, including some software research. © Business Monitor International Ltd Page 49 Israel Information Technology Report Q3 2015 Background All major vendors have a direct presence in Israel, employing substantial numbers of staff. For example, IBM has its only IBM Global Services regional subsidiary in Petach Tikva and employs around 2,000 staff at its Haifa Labs and various IBM facilities in Rehovot and Jerusalem. Hewlett-Packard (HP) has as many as 4,000 employees and offers services and support through its subsidiary HP-OMS. Other vendors such as Oracle and EDS also have a sizeable presence. Foreign direct investment (FDI) first started to play a key role in Israel's economy in the mid-1990s as the country's high-tech sector underwent a rapid expansion. As well as the opening up of the financial and telecoms sectors, the high-tech sector succeeded in attracting large FDI inflows. The government's policy made foreign high-tech companies eligible for government grants covering 38% of the cost of new research and development facilities. Today, Israel has more offshore R&D centres of US high-tech companies than any other country. Local companies also have a significant presence in the Israeli IT market, with seven of the top 10 IT services firms being Israeli. Major players include Matrix, Ness Technologies and Malam Group, with Israel typically accounting for 40-50% of their revenue. 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. © Business Monitor International Ltd Page 50 Israel Information Technology Report Q3 2015 Government Initiatives - Continued Initiative Details Lehava project Group of initiatives to help close digital divide. Source: BMI © Business Monitor International Ltd Page 51 Israel Information Technology Report Q3 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 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 Israel's 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. Intel agreed to take over the chip manufacturing plant owned by Micron in Kiryat in September 2013. Israel had originally built the Micron plant in 1993, before moving to the larger adjacent Fab28 facility, and leasing the original plant to Micron. Intel plans to retain most of Micron's 800 staff. Intel is expected to refurbish the plant to make it capable of manufacturing 10 nanometre chips, although the company will initially manufacture NOR flash memories for Micron. In 2011 the government offered Intel an ILS1bn grant to build a major new plant, and it has been reported that the government may provide a grant of ILS300-400mn for the upgrade of the Micron plant. Source: BMI © Business Monitor International Ltd Page 52 Israel Information Technology Report Q3 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 April 2015, Amdocs announced it entered into a definitive agreement to acquire a substantial majority of Comverse's business support systems (BSS) unit for around USD272mn. It expects the acquisition to be completed by September 2015. 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 53 Israel Information Technology Report Q3 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 (VPN) 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 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 ■ ■ ■ ■ ■ 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. Check Point reported revenue of USD1.496bn in 2014, up 7% y-o-y and nonGAAP operating income of USD866mn, representing a profit margin of 58%. 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 54 Israel Information Technology Report Q3 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 ■ ■ ■ Imperva reported total revenue of USD42.7mn for Q314, up 22% y-o-y. Services revenue increased 36% and combined product and subscription revenue increased 23% y-o-y in Q314. The company however reported a GAAP net loss of USD13.6mn for the quarter, widening from its loss of USD3.8mn in the same period of 2013. 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. In March 2013 Israeli security services company Incapsula, an Imperva subsidiary, was valued at around USD950mn after proving successful among small-and medium sized businesses. Incapsula provides high-end firewalls to assess incoming traffic and identify possible bugs. Source: BMI © Business Monitor International Ltd Page 55 Israel Information Technology Report Q3 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 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), data centre, 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. Data Center: 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. Company Developments ■ 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 56 Israel Information Technology Report Q3 2015 Company Profile Matrix SWOT Analysis Strengths Weaknesses Opportunities ■ Global client base in more than 50 countries. ■ Working with different industries. ■ Partnerships with major international IT companies. ■ Reliance on government projects, which can waver with economic outlook. ■ Lacks scale to compete with global leaders. ■ Increased presence in the US opens avenues to higher value software development and testing deals. ■ Broad range of capabilities and expertise creates potential for larger contract deployments. ■ International outlook allows for expansion of services. Israel is emerging as an IT hub, bringing attention to local companies. ■ Developing Big Data and cyber security products, which will be in increasing demand over the coming years. Threats ■ Israel's IT Market is highly competitive, with several players. ■ Increasing competition from emerging market IT software providers and services providers as they look to move up the value chain. Company Overview Matrix is a leading IT company in Israel that develops and implements technologies, software solutions and products, as well as providing infrastructure and consulting services, outsourcing, offshoring, training and assimilation. It also represents and carries out marketing for the world's leading software vendors in Israel, including IBM, Microsoft, Oracle, RedHat, EMC, SAP, HP and Apple. © Business Monitor International Ltd Page 57 Israel Information Technology Report Q3 2015 Matrix is part of the Israeli-owned Formula Systems group, which also includes Magic Software and Sapiens. Unlike those two companies however, which focus more on their global client base, Matrix derives most of its revenues from the Israeli market. Matrix, which employs around 65,000 people, also owns a large number of subsidiaries, including information security provider 2bsecure, Matrix BI (business intelligence), Matrix Global (offshore and nearshore services in Israel and Eastern Europe), Tact Software (software testing company), Tangram Soft (IT services), Exzac (US subsidiary helping financial services institutions meet regulatory compliance requirements and defend against fraud) and Xtivia (US subsidiary offering database support, data warehouse and business intelligence products). Strategy Services include implementing integration projects, developing and marketing software technologies and products for business systems, providing infrastructure and consulting services, outsourcing contracts, training and assimilation, and acting as a distributor for global leading software products, hardware solutions, and IT infrastructures. Matrix has been restructuring and launching new services in order to meet changing market conditions. In 2013, the company expanded its range of products and vendor partnerships, signed a cooperation agreement with Amazon and established a dedicated cloud computing unit called Cloudzone. In 2012 Matrix increased its focuses on information and cyber security solutions through 2BSecure, which were consolidated with solutions targeting the cyber world at Matrix including fraud and money laundering prevention and the financial regulation of EXZAC. Financial Results For the first nine months of 2014, Matrix reported total revenues of ILS1.51bn, up 7.9% compared to revenues of ILS1.4 in 9M13. Growth was primarily driven by its core software solutions and services segment, where revenues increased 11% year-on-year (y-o-y) in Q314 and accounted for 74% of total revenue. Although marketing of software products remains nearly its smallest business segment, it was the fastest growing one, as revenues rose 35% y-o-y to ILS37.2mn in Q314, with an 80% rise in operating income. Revenues from integration and computer infrastructures also increased 4.5% to ILS62.1mn in Q314, while the training and embedding segment's revenues contracted slightly to ILS34.6mn. Matrix attributed its improved performance to increased volume of activity and greater operational efficiencies in its core IT software and services and marketing segments. During the year ended in December 2013, Matrix reported revenues of ILS1.932bn (USD555mn), down 2.7% y-o-y, and net profit of ILS89.1mn (USD25.6mn), down 1.7% y-o-y. However, revenues and net profits for Q413 both increased compared to the same period of 2012. In its 9M13 results, Matrix reported that weak revenues and profits were due to seasonal effects and the timing of Jewish holidays. For 2013, Matrix © Business Monitor International Ltd Page 58 Israel Information Technology Report Q3 2015 further reported that the software services sector accounted for 72.4% of revenues, up around 2pps from 2012. The marketing of software products segment accounted for 10.7% of revenues, while integration and computer structure accounted for 4.2%, and the training and deployment sector, 6.6% of revenues. Company Developments In its results presentation for the period ended June 2014, Matrix revealed key contracts which drove growth during the quarter. They included setting up and managing a business process outsourcing (BPO) project for a government ministry, valued at tens of millions of shekels, as well as setting up a banking system for the Bank of Israel, also worth tens of millions of shekels. In April 2014, Matrix announced that it had opened a new training centre in Nanjing, China, which will offer services to more than 500 Chinese IT firms. The centre will build its business in China, where it has already trained more than 8,000 IT professionals at its Development Center for Mobile Apps, launched in Changzhou in 2013. In 2013 Matrix continued to secure contracts in the financial, security, technology and public sectors. High profile contract wins included a service-orientated architecture (SOA) project for the Israeli Defense Forces (IDF) and a five-year inspection tender for the Social Security Institute. In H112 results, Matrix announced it had acquired USbased company Exzac, which specialises in risk management and regulation in the finance sector. The new acquisition offers clients in 'leading financial institutions' in the US and Israel. Matrix also acquired Netwise, which offers solutions for the digital world and management of effective, continuous, and valuable customer experience. In 2011, Matrix won projects in several areas. In the financial market Matrix deals included a loan system for a leading bank, core financial system in the field of taxes for a leading financial institution, and operation sites for two banking institutions in Israel and abroad, among others. Matrix also completed warehousing projects for large industrial companies and won significant bids for training and deployment projects for the Ministry of Finance and the police. In 2010, Matrix reported growth in revenue and profits thanks to momentum in key sectors and services. The company won new projects in the public sector and the insurance sector, with mobile/cellular projects a growth area. Telecoms was another growth vertical in summer 2010. Major projects included a new interface and integration for a high-tech organisation, a core financial system in the field of taxation for a leading bank and a multi-channel project for a pharmaceutical company. Despite the challenging economic climate of 2008 and 2009, Matrix reported continuing successes in key sectors including healthcare, financial services, defence and government. Among tender wins in the Israeli market were a project to implement a core system in three hospitals, a software and hardware upgrade for a leading credit card company and a large-scale testing project for a government organisation. In 2008, Matrix reported tender wins in sectors including defence, communication and industrial, © Business Monitor International Ltd Page 59 Israel Information Technology Report Q3 2015 including an ILS20mn project to implement a CRM system at long-time customer Bezeq, as well as a number of public sector CRM projects. Financial Data ■ ■ ■ ■ ■ ■ ■ ■ Company Details ■ ■ Revenues (2011): ILS1.758bn Revenues (2012): ILS1.984bn Revenues (2013): ILS1.932bn Revenues (2014): ILS2.102bn Net Profit (2011): ILS93.4mn Net Profit (2012): ILS90.7mn Net Profit (2013): ILS89.1mn Net Profit (2014): ILS91.22mn Matrix 3 Abba Eban Boulevard PO Box 2062 Herzlia Pituach 46120 Israel ■ Tel: +972/(0) 9 959 8840 ■ Fax: (0) 9 959 8844 ■ www.matrix.co.il © Business Monitor International Ltd Page 60 Israel Information Technology Report Q3 2015 Ness SWOT Analysis Strengths Weaknesses ■ Acquisition by Hilan Tech will see new investment into operations. ■ Large international presence and wide client base. ■ Several technology centres in India, one of the fastest growing IT markets. ■ Acquisition by private equity rather than a technology company in 2010 limited access to scale and expertise in the IT field. Opportunities ■ Slow revenue growth. ■ Acquisition by Hilan Tech will allow greater focus on core businesses and core domestic market of Israel. ■ Major deals with banks and governments provide growth. ■ Acquisition of Imano offers strong potential for moving into the mobile app segment. ■ Onshore presence in the US opens doors to high value mobility and analytics software development opportunities for corporates. Threats ■ Israel's IT market is competitive, with several players. ■ Software development and offshoring are areas of intensifying competition, as vendors in emerging markets attempt to move up the value chain. Company Overview Ness Technologies is an Israeli company and global provider of end-to-end IT services and solutions. The company was founded in 1999. On June 10 2011, Ness announced it would be acquired by an affiliate of Citi Venture Capital International (CVCI) in an allcash transaction valued at approximately USD307mn. Ness announced on October 11 2011 that the acquisition was finalised. The company subsequently delisted and ceased trading on the Nasdaq Global Select Market and the Tel Aviv Stock Exchange. Since the acquisition, Ness has rarely publicised new contract wins or made announcements relating to the progress on existing contracts. In June 2014 Israeli IT firm Hilan announced that it had acquired Ness Israel, a subsidiary of Ness Technologies, for USD42mn. Ness specialises in outsourcing, © Business Monitor International Ltd Page 61 Israel Information Technology Report Q3 2015 systems integration and application development, software and consulting as well as quality assurance and training. Ness Technologies is divided into four main businesses: Ness Software Engineering Services (SES), Ness Central & Eastern Europe, Ness TSG, which offers IT services for defence and security, and Ness Israel. Ness Israel has around 2,700 employees and more than 500 clients. Its head office is in Tel Aviv and it has four more branches in Israel's Advanced Technologies Park, BeerSheva, Lod and Jerusalem. The company provides business service management (BSM) solutions include capabilities for system development and integration, analytics and business intelligence, expertise in SAP, remote development centres, testing and training. Strategy Prior to Hilan's acquisition of Ness Israel, the company's plans included a focus on improving margins in its Israeli business and reducing non-core staff, with the aim of creating profitability at the company. Having already divested stakes in non-core operations such as in Asia Pacific and Europe, the company's operations are more focused. The acquisition of Imano in 2012 show's Ness' ability to respond to global trends, increasing its ability to cater to mobile device growth and the demand for products that work on wireless devices. As well as expanding its presence in mobility and analytics, Ness is also opening new offices to offer a range of onshore, nearshore and offshore services. Financial Results Following its acquisition by CVCI, Ness stopped reporting separate financial results. These data are provided for reference only. The company has not reported annual or quarterly revenue since 2011, but is widely reported in Israeli media to be struggling financially. Company Developments In June 2014, Hilan, an Israeli firm which specialises in human resource management services, announced that it had acquired Ness Israel from CVCI for USD42mn. Hilan stated that the net sale would be for USD32mn, in order to create working capital of USD10mn for Ness Israel, which has reportedly struggled over the last several years. When the deal closes, Ness Israel CEO Shachar Efal will acquire 10% of the company. Although Ness Israel does not dominate the country's IT market as much as it once did, it will still offer a major boost to Hilan's position in the market and range of capabilities. Ness Israel's turnover reportedly reached around ILS700mn in 2013, compared to Hilan's revenue of ILS430mn. Meanwhile, Ness Israel has a total workforce of 2,700, compared to Hilan's employee base of around 500. © Business Monitor International Ltd Page 62 Israel Information Technology Report Q3 2015 In March 2014, Ness became the first unionised high-tech company in Israel. More than a third of the company's employees joined the Histadrut labour federation, in an attempt to protect their interests against company downsizing. In March 2013 Ness Technologies announced the opening of a new development centre in Pittsburgh in the US. The launch of the Pittsburgh Development Centre is part of Ness' strategy of building a strong onshore presence to compliment its offshore and nearshore development centres in India, Eastern Europe, Singapore and Israel. The Pittsburgh centre will specialise in mobility and business analytics, as well as providing a full spectrum of engineering services. The location was selected to provide proximity to US corporate locations, for better collaboration and flexibility of resources, as well as being close to major universities for hiring purposes. Contracts In August 2012 Ness announced a 10-year contract with the Israeli Ministry of Finance to create a new national long term savings and insurance exchange. So important is the project to Ness that the company established a dedicated subsidiary called SwiftNess to develop and operate the National Exchange, including a service and support centre. The new exchange is expected to streamline work processes and provide the public with information about the retirement savings and insurance plans on offer. The first phase of the project was scheduled to begin offering funds transfers and information transmission to insurance brokers and banks in Q213. Later developments will allow individuals and enterprises to access information in the exchange. In January 2011, Ness' software engineering unit became a partner for Pegasus Solutions. The two companies established an extended software development centre in Mumbai. Ness' Software Product Engineering division continued to be a strong performer in Q111, with a major boost from the software engineering outsourcing contract signed with Barclays Capital. In the same quarter, Ness' Commercial and Civilian business unit reported 4% annualised organic growth, with the biggest win being the USD17mn contract with Israel Electric Corporation. The Defence and Homeland Security unit was described as slightly behind plan with revenue, but reported strong operating margins, boosted by a big deal with the Israel Ministry of Defence. In Q111 one big win reported by Ness in the Israeli market in H111 was a USD17mn deal with Israel Electric Corporation, for which Ness implemented a range of SAP solutions and provide support over a five-year period. Other successes included a USD10mn deal with the Israel Ministry of Defence and a USD5mn deal with Derech Eretz, the operator of the TransIsrael toll road. In September 2010, Ness won a USD3.7mn, five-year contract from Israel's Meitav Regional Water and Sewage Corporation to provide development, improvement and maintenance services for the company's SAP-based ERP and billing system. The contract also included an optional three-year extension, valued at USD2.2mn. The company continued to be strong in the financial services sector, with a USD1.1mn contract win in October 2010 from Israel Direct Insurance (IDI) to implement a company- © Business Monitor International Ltd Page 63 Israel Information Technology Report Q3 2015 wide, SAP-based ERP system. The new system will comprise financial, logistics and HR modules. Financial Data ■ ■ ■ Company Details ■ ■ Revenues (Global, 2010): USD571.8mn Revenues (Global, Q111): USD137.3mn Revenues (Global, Q211): USD141.3mn Ness Israel Ness Tower Atidim Industrial Park P O Box 58152 Tel Aviv 61580 Israel ■ Tel: +972/3 766 6800 ■ Fax: 3 766 6809 ■ www.ness.com © Business Monitor International Ltd Page 64 Israel Information Technology Report Q3 2015 Hilan SWOT Analysis Strengths Weaknesses ■ Steady growth in revenues and market capitalisation throughout 2009-2013. ■ Strong foothold in its core area of expertise: human resource management. ■ Revenues declined y-o-y in Q114 and Q214. ■ Operations solely focused on Israel, meaning that it is highly sensitive to any slowdown in Israel's economy and the impact it would have on IT spending. Opportunities ■ Exposed to the high-growth cloud computing and IT security markets though subsidiary We! ■ Opportunity to turn around recently acquired Ness Israel's business by re-focusing on the local market, where there remains considerable growth potential. ■ Israel's vibrant startup and SME market continues to grow and generate new customers for Hilan's core human resource management software. ■ Rapidly growing economies and demand for IT solutions across the MENA region offers opportunity for regional expansion. Threats ■ Consolidating operations with Ness Israel, which is doubles Hilan's size and has underperformed in recent years, could prove challenging. ■ Increasing investment from global IT firms in Israel is intensifying competition in Israel's IT market. Company Overview Hilan is a Software-as-a-Service (SaaS) company that offers comprehensive solutions for managing human capital. Its software and services cover payroll, human resources, presence and pensions, and helps companies manage the lifecycle of employees from recruitment to retirement. The company was first founded in 1968 and staged an initial public offering (IPO) on the Tel Aviv Stock Exchange in 1993. The largest shareholder is DCL Technologies, with a 47.5% stake, followed by Migdal Group with a 12.2% stake. At the end of 2013 Hilan had 1,187 employees. © Business Monitor International Ltd Page 65 Israel Information Technology Report Q3 2015 Hilan's core solutions and products are divided into four categories: Hilan Pension, Hilan Presence, Hilan HR and Hilan Salary. The company manages HR systems for around 1,800 companies and organisations and more than 800,000 employees across a wide range of sectors. These include the high-tech, banking and finance, colleges and universities, communications, healthcare, transportation, retail, education, hospitality and public sectors. Hilan also offers IT infrastructure solutions and business intelligence through its subsidiaries We! and Qlik View Israel. We! This is a branch of Hilan specialising in IT infrastructure, including cloud computing, virtualisation, centralised storage, disaster recovery, Big Data and data and communication security. We! is divided into three main business segments: System Infrastructure, Information Security and Cloud Computing. We! has business partnerships with Cisco, VMware, NetApp, IBM, ArcSight, VerdaSys, Microsoft and Citrix. Qlik View Israel This branch of the company specialises in business intelligence and business detection. Qlik software interacts with customers' existing SAP, Microsoft, SQL, Oracle and Salesforce systems, combining information from all different sources into a user friendly platform. Customers can then use Qlik's associate capabilities to draw links and highlight patterns between the different data and, finally, manipulate them into easy to understand charts, graphs, lists, etc. Qlik has tailored its software for several key sectors, including financial services, marketing, manufacturing and infrastructure, telecoms, pharmaceutical and medical and the public sector. © Business Monitor International Ltd Page 66 Israel Information Technology Report Q3 2015 Steady Growth Hilan Share Price, 2009-2014 (ILS) Source: Bloomberg Strategy With a very strong presence in its core field of human resource management, Hilan has been expanding its capabilities through acquisitions. It ramped up this strategy in June 2014, when it announced the acquisition of Ness Israel, the Israel-focused segment of global IT firm Ness, for USD42mn. Hilan stated that the net sale would be for USD32mn, in order to create working capital of USD10mn for Ness Israel, which has reportedly struggled over the last several years. Hilan completed the acquisition of Ness Israel on November 10 2014, acquiring the entire company except for the security unit and pension clearing operations. Hilan now holds 99% of the capital of Ness Israel. The latter's CEO Shahar Ef'al owns the remaining 1% of the company, with the option of purchasing an additional 8.99% back from Hilan. The acquisition will drastically increase Hilan's share of Israel's IT market and its range of services. Ness specialises in outsourcing, systems integration and application development, software and consulting as well as quality assurance and training. It will also more than double the size of the company; Ness Israel's employee base is estimated at around 2,700 and its turnover reportedly reached around ILS700mn in 2013, compared to Hilan's revenue of ILS430mn. © Business Monitor International Ltd Page 67 Israel Information Technology Report Q3 2015 Table: Hilan Financial KPIs, 2008-2014 2008 2009 2010 2011 2012 2013 2014 220.9 225.3 259.5 361.4 390.5 420.4 520.1 10.2 80.4 99.5 199.9 215.1 236.1 236.7 127.8 134.1 147.4 161.5 175.4 184.3 190.0 o/w Business Information Services 82.9 10.8 12.6 - EBITDA 58.4 57.6 67.6 72.8 78.8 79.6 84.3 EBITDA Margin (%) 26.4 25.6 26.1 20.2 20.2 18.9 16.2 Net Income Before XO 23.5 37.8 40.4 40.3 45.4 48.5 53.9 Total Revenues o/w Software Sales o/w Human Resource Services - - - Note: XO = extraordinary items. Source: Hilan, Bloomberg Company Details ■ ■ Hilan Hilan House 12 Hamasgar Street Tel Aviv Address line 4 67776 Israel ■ 972-03-638-3333 ■ http://www.hilan.co.il/ © Business Monitor International Ltd Page 68 Israel Information Technology Report Q3 2015 Regional Overview Middle East & 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 MEA than in other regions. Middle East and Africa (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 69 Israel Information Technology Report Q3 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. Meanwhile, 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 these markets, especially as Asian brands look to continue international © Business Monitor International Ltd Page 70 Israel Information Technology Report Q3 2015 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 United Arab Emirates, 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 fashion-driven 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 71 Israel Information Technology Report Q3 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 72 Israel Information Technology Report Q3 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 73 Israel Information Technology Report Q3 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 74 Israel Information Technology Report Q3 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 75 Israel Information Technology Report Q3 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 76 Israel Information Technology Report Q3 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 77 Israel Information Technology Report Q3 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 78 Israel Information Technology Report Q3 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 79 Israel Information Technology Report Q3 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 80 Israel Information Technology Report Q3 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 81 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... 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 Q3 2015 Industry Forecast IT Market Table: IT Industry - Historical Data And Forecasts (Israel 2012-2019) 2012e IT market value, ILSmn 2013e 2014e 2015f 2016f 2017f 2018f 2019f 22,299.5 22,576.0 23,354.8 24,607.9 26,490.5 27,698.4... International Ltd Page 15 Israel Information Technology Report Q3 2015 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 2015 Outlook We project real GDP growth of 3.1% in Israel in 2015, an improvement... International Ltd Page 19 Israel Information Technology Report Q3 2015 Macroeconomic Forecasts Economic Analysis BMI View: We forecast real GDP growth of 3.1% and 3.4% in Israel in 2015 and 2016 respectively, from 2.6% in 2014 A pickup in fixed capital formation - the result of low base effects - will be the main growth driver this year as private and government consumption slow slightly Beyond 2015, a moderation... wage hikes having been implemented last year and the Bank of Israel' s benchmark interest rate down to 0.10% in February We forecast private consumption growth of 3.1% and 3.4% in 2015 and 2016 respectively, compared with 2.8% last year © Business Monitor International Ltd Page 21 Israel Information Technology Report Q3 2015 One-Off Jump Israel - Real GDP, % chg q-o-q (annualised) Source: BMI, Central... to 1, indicating that consumers are beginning to embrace the new form factor © Business Monitor International Ltd Page 33 Israel Information Technology Report Q3 2015 Israel PC Browsing Traffic By OS (%) And y-o-y Change (pp) April 2015 Source: Statcounter Vendor Performance The Israeli PC market has undergone significant changes in terms of market shares In the PC market, the top three vendors, HP,... and the Israeli Defense Forces, government ministries and public agencies 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 © Business Monitor International Ltd Page 35 Israel Information Technology Report Q3 2015 become more important in 2015, ... sector, the second largest increase after defence © Business Monitor International Ltd Page 22 Israel Information Technology Report Q3 2015 No Trend Reversal Israel - Bank Hapoalim Purchasing Managers' Index Source: BMI, Bank Hapoalim Fixed Investment Outlook: Gross fixed capital formation (GFCF) will rebound in 2015 on the back of low base effects and near-zero interest rates GFCF contracted by 2.0% in... a target of nearly © Business Monitor International Ltd Page 23 Israel Information Technology Report Q3 2015 doubling production capacity to 20bcm once complete We project fixed investment to contract by 1.5% in 2014 and expand by 4.0% in 2015, and to grow by 4.5% on average over the next five years Investment Opportunities Lie Ahead Israel - Gas Production (bcm) 25 20 15 10 5 Dry natural gas production,... the back of an uptick in domestic consumption and fixed investment © Business Monitor International Ltd Page 24 Israel Information Technology Report Q3 2015 Table: Economic Activity (Israel 2010-2019) Nominal GDP, USDbn Real GDP growth, % y-o-y GDP per capita, USD 2010 2011 2012e 2013e 2014e 2015f 2016f 2017f 2018f 2019f 233.3 258.4 257.3 290.6 302.8 296.6 316.5 344.7 367.7 392.2 5.8 4.2 3.0 3.2 2.6... Business Monitor International Ltd Page 25 Israel Information Technology Report Q3 2015 Industry Risk Reward Index Middle East And Africa Risk/Reward Index - Q31 5 There has been some shuffling in the rankings in this quarter's update to the Middle East and Africa (MEA) IT Risk/Reward Index (RRI), though no country has dropped out of a top five or top 10 position Israel held its spot at the top, reflecting