Israel information technology report q1 2010

... any information hereto contained Israel Information Technology Report Q1 2010 © Business Monitor International Ltd Page Israel Information Technology Report Q1 2010 CONTENTS Executive Summary... International Ltd Page 28 Israel Information Technology Report Q1 2010 Israeli IT Industry - Historical Data & Forecasts (US$mn, unless otherwise stated) IT Sector, Q1 2010 2007 2008 2009f 2010f 2011f 2012f... in the eurozone, could undermine demand for Israeli exports © Business Monitor International Ltd Page 10 Israel Information Technology Report Q1 2010 Israel Business Environment SWOT Strengths

Q1 2010 www.businessmonitor.com ISraeL information technology Report INCLUDES 5-YEAR FORECASTS TO 2014 ISSN 1752-4245 Published by Business Monitor International Ltd. Israel Information Technology Report Q1 2010 Including 5-year industry forecasts by BMI Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Publication date: January 2010 Business Monitor International Mermaid House, 2 Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2010 Business Monitor International. All rights reserved. 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All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Israel Information Technology Report Q1 2010 © Business Monitor International Ltd Page 2 Israel Information Technology Report Q1 2010 CONTENTS Executive Summary .........................................................................................................................................5 SWOT Analysis.................................................................................................................................................8 Israel IT Sector SWOT .......................................................................................................................................................................................... 8 Israel Telecommunications Industry SWOT........................................................................................................................................................... 9 Israel Political SWOT.......................................................................................................................................................................................... 10 Israel Economic SWOT........................................................................................................................................................................................ 10 Israel Business Environment SWOT .................................................................................................................................................................... 11 IT Business Environment Ratings................................................................................................................12 Regional IT Business Environment Ratings ......................................................................................................................................................... 14 Middle East Regional IT Markets Overview .................................................................................................15 IT Penetration...................................................................................................................................................................................................... 15 Market Growth & Drivers ................................................................................................................................................................................... 16 Sectors & Verticals .............................................................................................................................................................................................. 17 Market Overview .............................................................................................................................................19 Government Authority.......................................................................................................................................................................................... 19 Government Initiatives......................................................................................................................................................................................... 20 Hardware............................................................................................................................................................................................................. 20 Software............................................................................................................................................................................................................... 22 Services................................................................................................................................................................................................................ 23 Industry Developments ........................................................................................................................................................................................ 24 Industry Forecast Scenario ...........................................................................................................................27 Israeli IT Industry - Historical Data & Forecasts (US$mn, unless otherwise stated) .......................................................................................... 29 Internet ................................................................................................................................................................................................................ 30 Table: Internet Data & Forecasts........................................................................................................................................................................ 30 Country Context................................................................................................................................................................................................... 31 Consumer Expenditure, 2000-2012 (US$) ........................................................................................................................................................... 31 Rural/Urban Breakdown, 2005-2030................................................................................................................................................................... 31 Competitive Landscape .................................................................................................................................32 Macroeconomic Forecast .................................................................................................................................................................................... 35 Table: Israel – Economic Activity, 2006-2014..................................................................................................................................................... 37 Company Profiles...........................................................................................................................................38 Ness ..................................................................................................................................................................................................................... 38 IBM...................................................................................................................................................................................................................... 40 HP........................................................................................................................................................................................................................ 41 Matrix .................................................................................................................................................................................................................. 43 Microsoft.............................................................................................................................................................................................................. 45 Country Snapshot: Israel Demographic Data..............................................................................................46 Section 1: Population........................................................................................................................................................................................... 46 Table: Demographic Indicators, 2005-2030........................................................................................................................................................ 46 Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 47 Section 2: Education And Healthcare.................................................................................................................................................................. 47 © Business Monitor International Ltd Page 3 Israel Information Technology Report Q1 2010 Table: Education, 2002-2005 .............................................................................................................................................................................. 47 Table: Vital Statistics, 2005-2030........................................................................................................................................................................ 47 Section 3: Labour Market And Spending Power .................................................................................................................................................. 48 Table: Employment Indicators, 2001-2006.......................................................................................................................................................... 48 Table: Consumer Expenditure, 2000-2012 (US$)................................................................................................................................................ 48 Table: Average Annual Wages, 2000-2012.......................................................................................................................................................... 49 BMI Methodology ...........................................................................................................................................50 IT Ratings – Methodology......................................................................................................................................................................................... 50 Ratings Overview................................................................................................................................................................................................. 50 Table: IT Business Environment Indicators ......................................................................................................................................................... 51 Weighting............................................................................................................................................................................................................. 52 Table: Weighting Of Components ........................................................................................................................................................................ 52 How We Generate Our Industry Forecasts .......................................................................................................................................................... 52 IT Industry ........................................................................................................................................................................................................... 53 Sources ................................................................................................................................................................................................................ 53 © Business Monitor International Ltd Page 4 Israel Information Technology Report Q1 2010 Executive Summary Market Overview BMI projects that the Israeli IT market will have a value of US$4.9bn in 2010 and will grow at a fiveyear CAGR of 6% to a projected US$6.2bn in 2014. The Israeli IT market should have enough momentum from key sectors to expand over BMI's 2010-2014 forecast period, thanks to relatively stable demand from defence and government sectors, and opportunities in verticals like financial services and small and medium-sized enterprises (SMEs). Spending is forecast to resume single-digit growth in 2010, with a boost, particularly in the second half of 2010, from computer hardware tenders delayed from 2009. BMI tentatively expected conditions to improve in the final quarter of 2009 with a seasonal upturn reinforced by procurements deferred from the first half of the year. The Israeli IT market has a number of positive fundamentals, which should keep it in positive territory during BMI's five-year forecast period. Low computer penetration of around 30% offers potential for continued growth. High internet penetration and growing broadband penetration are drivers for the retail segment, while the financial services sector accounts for about 15% of Israeli IT spending. Industry Developments In 2009, Israel's high-tech sector suffered as demand for high-tech exports dropped by at least 10-15%, with as many as 10,000 sector jobs feared to be at risk. This represented a major concern for the Israeli government given that high-tech accounted for around 10% of Israel's economy, with annual sales estimated at around US$25bn. Major IT firms were retrenching in Israel, including SAP, Cisco and HP. IT is viewed as an important policy tool for the Israeli government's 2008-2010 socio-economic policy framework. In 2009 the National Economic Council recently submitted a policy agenda to the government, which specified two main policy tracks of reducing poverty and achieving balanced growth. The first track was expected to emerge as the main priority. As part of its modernisation agenda, the government is pressing ahead with various other strands of its egovernment project. Among other initiatives, there has also 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 agreements with vendors like Dell and HP. Competitive Landscape The Israeli IT services market is competitive, with leading multinational competitors IBM and HP both estimated to have Israeli IT services market shares of below 10%. Following its merger with EDS, US giant HP was projected to take around 10% of the Israel IT services market last year. HP Israel's © Business Monitor International Ltd Page 5 Israel Information Technology Report Q1 2010 software division hosts HP's biggest research and development (R&D) centre worldwide, and the company also has significant production facilities in Israel. Leading Israeli IT services vendors experienced mixed fortunes in H109. Market leader Matrix reported wins in a number of key sectors including healthcare, financial services, defence and government. In Q309 Matrix reported 100% annualised growth in net profits, and 7% growth in operating profits on flat revenue growth. Ness Israel, by contrast, reported a 19% decline in revenues for Q209, although 30% of this was due to currency translation. In 2009, enterprise software giant Oracle was in discussion with Israel Credit Cards Cal (ICC-Cal) concerning the future of a major computerisation project being implemented by Oracle. Oracle initiated the project, to replace and upgrade ICC-Cal's computer systems, some 18 months ago. However, differences had apparently arisen between Oracle and ICC-Cal concerning the project. Meanwhile, in 2008, Oracle rival SAP reached an agreement with Ness to purchase the latter's SAP sales and distribution division in Israel. Computer Sales The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is projected at US$2.2bn in 2010, up from US$2.1bn in 2009. The market is expected to grow at a CAGR of 5% over the forecast period to reach US$2.7bn in 2014. The Israeli government has launched various initiatives to increase computer and internet penetration. Spending is expected to resume single-digit growth in 2010, after a contraction in 2009 due to the economic slowdown and unemployment hitting consumer demand for electronics goods. Household consumption moved into negative territory in 2009, with spending on household equipment down by 6.7% in Q109, and although BMI forecast a slight recovery in H209, trading conditions remained tough. Software Israeli software spending is projected at US$1.0bn in 2010, up from US$973mn in 2009. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period. Businesses were expected to remain cautious in H209, deferring investments, or looking for good enough solutions to immediate problems. However, there should still be several growth areas going forward. Spending on software is shifting towards the SME segment, which forms the mainstay of the Israeli business sector. Spend on enterprise solutions has grown since 2007, with reviving or emerging areas of opportunity including security, customer relationship management (CRM) solutions and business intelligence. In terms of verticals, the financial sector has been a mainstay of demand, with other key opportunities including defence and healthcare. © Business Monitor International Ltd Page 6 Israel Information Technology Report Q1 2010 IT Services The IT services segment is estimated at US$1.6bn in 2010, and this is expected to grow at a CAGR of 7% over the forecast period to reach US$2.2bn in 2014. In 2009, there were reports of IT managers scaling back projects, and vendors will have to adapt to an environment where some projects are commissioned more in response to immediate needs. Government and defence are two key sectors likely to be a continued source of opportunities, because the factors driving spending in each case are not particularly sensitive to economic vicissitudes. Another key area of opportunity is healthcare IT. Despite failing to capitalise in the past, Israel is starting to emerge as a desirable location for packaged applications and localisation services. E-Readiness Israel's high PC penetration and the growing availability of broadband access mean that internet penetration is likely to continue its upward trajectory. The government has announced that it intends to make a big effort to narrow the digital gaps that manifest themselves across various demographic lines. Israel's strong broadband growth has long relied on a handful of developments across the market. These include the competition between Bezeq and the cable companies, with five major internet service providers (ISPs) vying for market share from both the corporate and residential markets, which enjoy high PC penetration rates, advanced telecoms infrastructure and minimal regulatory intervention. Another development likely to stimulate growth is the introduction of local loop unbundling (LLU), which will give alternative operators access to Bezeq's network and will stimulate much greater competition. LLU is due to be implemented by end-2009. © Business Monitor International Ltd Page 7 Israel Information Technology Report Q1 2010 SWOT Analysis Israel IT Sector SWOT Strengths Weaknesses Opportunities Threats ƒ One of the most modern economies in the region, with a highly educated, linguistically skilled workforce and relatively low labour costs compared with most developed countries. ƒ Strong defence and government spending provides base of IT demand. ƒ Relatively mature IT market, with services accounting for an estimated 32% of spending in 2008. Despite this, the market for basic IT hardware and software is far from saturated. ƒ Strong political support, with government having implemented a number of policies to aid in the development, success and expansion of the IT sector. ƒ The recession at the beginning of the decade created a client mentality of focusing on the bottom line, with enhanced services customer market power adding to pressure on pricing and margins. ƒ Digital divide, with 3% of bottom income group having home internet access. ƒ Despite financial crisis, the financial services sector, which accounts for around 15% of spending, will have to spend on compliance with Basel II and other international standards, driving growth. ƒ Defence and government projects should be relatively less sensitive to the economic downturn. ƒ Outsourcing, software as a service (SaaS) and applications management likely to grow fastest out of IT services, with particular opportunities in financial sector. ƒ Opportunities for partnership/investment in Israel's lively local IT company sector. ƒ Healthcare IT will be a growing source of opportunity. ƒ Economic downturn and unemployment will lead to weaker consumer and business sentiment. ƒ Other factors may affect business confidence, notably the security situation. ƒ The weaker local currency, and aggressive pricing, may continue to constrain growth and put pressure on margins. © Business Monitor International Ltd Page 8 Israel Information Technology Report Q1 2010 Israel Telecommunications Industry SWOT Strengths Weaknesses Opportunities Threats ƒ Well-developed internet/broadband sector compared with regional peers. ƒ Liberal mobile market consisting of four operators. ƒ Mature market with strong take-up of value-added and 3G services. ƒ Mobile penetration rate of over 120% means that growth in the mobile market has slowed considerably and operators must look for alternative revenue sources. ƒ Lack of competition in all telecoms sectors. ƒ Regulator has been slow to license new services, such as Worldwide Interoperability for Microwave Access (WiMAX) wireless broadband. ƒ Voice over Internet Protocol (VoIP) licensing and triple-play for Bezeq placed on hold, which could hinder prospects. ƒ Emergence of rival operator HOT Telecom, made up of main three cable operators (Golden Channels, Matav and Tevel) to compete against Bezeq could provide cheaper services. ƒ Introduction of number portability and the entry of mobile virtual network operators (MVNOs) to the mobile sector could shake up competition and drive down retail prices for consumers. ƒ Continued interconnection tariff reduction could have a devastating effect on operators' revenues. ƒ Operators, Bezeq in particular, have resisted the introduction of number portability, which could lead to a price war and drive down mobile revenues. ƒ Operators are also hostile to the introduction of MVNOs. © Business Monitor International Ltd Page 9 Israel Information Technology Report Q1 2010 Israel Political SWOT ƒ Despite corruption allegations against some officials and members of parliament, government members are still some of the most accountable in the region. ƒ Elections are for the most part free and transparent, ensuring that a broad spectrum of political views is represented within government. ƒ The protracted conflict with the Palestinians means there are persistent security risks, although violence in the West bank has been reduced significantly. Strategies to minimise or end the conflict are domestically divisive. ƒ Frequent change to the composition of the coalition government often leads to policies becoming fragmented or significantly diluted. Opportunities ƒ The Annapolis conference in November 2007 laid the foundations for an eventual peace agreement with the Palestinians, and improved relations with traditionally hostile Arab states, particularly Saudi Arabia. Threats ƒ The victory of Hamas in the 2006 Palestinian elections, its subsequent takeover of the Gaza Strip, and Israel's military incursion into the territory in December 2008/January 2009 has added to uncertainty. Finding a lasting solution poses a dilemma for Israel, which has previously said it will not talk to the militant organisation. ƒ The construction of the West Bank barrier and the continued home-building in some West Bank settlements antagonises the Palestinians and stands in the way of the peace process. ƒ Iranian president Mahmoud Ahmadinejad's re-election will add to Israeli concerns about a possible Iranian nuclear weapons programme. Strengths Weaknesses Israel Economic SWOT Strengths Weaknesses Opportunities Threats ƒ The policy framework has stabilised in recent years with fiscal deficits brought well under control (although the deficit is set to expand again in 2009). ƒ The workforce is highly educated and skilled. ƒ The country's close ties with the US provide it with substantial financial assistance for economic and military ends. ƒ The main downside risk to the economy is the security situation. A sharp deterioration can have an immediate impact on domestic confidence, tourism receipts, the exchange rate and foreign investment. ƒ The economy is highly exposed to that of the US, in terms of exports, investment and remittances. ƒ In the long term, rising levels of employment will underpin private consumption growth. ƒ FDI stocks amounted to 37% of GDP in 2007, according to UNCTAD, and remained robust in 2008; this should continue to propel growth for some years to come. ƒ As a net fuel importer, Israel is vulnerable to large price fluctuations; the surge in oil prices in 2008 contributed to rising inflation. ƒ Competition from emerging Chinese and Indian producers of high-tech goods and polished diamonds, as well as sluggish growth in the eurozone, could undermine demand for Israeli exports. © Business Monitor International Ltd Page 10 Israel Information Technology Report Q1 2010 Israel Business Environment SWOT Strengths Weaknesses Opportunities Threats ƒ The business environment is supported by the sound infrastructure and communication networks, as well as transparent legislation. ƒ The banking system is one of the most sophisticated in the region, and offers a wide range of both consumer and commercial credit products. ƒ Historic political instability increases the risk premium of investment in Israel. ƒ Some limits on repatriation of capital exist and there are constraints on foreign investment in the high-tech sector. ƒ Ongoing cuts will bring the top level of corporate tax down from 29% in 2007 to 25% by 2010. ƒ The Qualified Industrial Zone agreements with Jordan and Egypt boost the potential for trade. ƒ Strike action has proved extremely disruptive to the business environment over the past two years. © Business Monitor International Ltd Page 11 Israel Information Technology Report Q1 2010 IT Business Environment Ratings MEA IT Business Environment Ratings BMI’s Middle East and Africa (MEA) IT Business Environment Ratings compare the potential of the key regional markets over our forecast period, through to 2014. The ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights protection and government projects. In our updated Q110 ratings, the wealthy, high-tech Gulf Co-operation Council (GCC) markets continue to occupy the higher rankings, with factors such as comparatively resilient consumer demand and ongoing infrastructure projects making this region relatively well positioned for the post-credit-crunch era. However, in most cases we do not see IT spending returning to its pre-crisis rate of growth over our fiveyear forecast period. The top four countries in our IT rankings table remain the same. Despite recent financial concerns, the UAE has the top spot. Qatar moves into second place, ahead of Kuwait, which drops to third. Still in fourth place is Israel, where low computer penetration of around 30% offers potential for continued growth and about 50% of IT spending is accounted for by government and military projects Bahrain, Saudi Arabia and Oman occupy the next three places, and – like Qatar – spending is expected to pick up in 2010 following a slowdown in 2009 when businesses and consumers spent cautiously due to the economic slowdown. Economic reform and trade liberalisation will fuel spending on IT by both public sector organisations and enterprises. South Africa’s ’s relatively lowly eighth spot reflects business environment risks rather than the potential of the country’s IT market, which will receive stimulus from infrastructure initiatives. Turkey is expected to be a regional outperformer as the focus of demand shifts towards the Anatolian region and the rate of PC penetration rises. Bringing up the field, Egypt’s high growth potential is constrained by income and business environment considerations, while uncertainties continue to surround the Lebanon IT market, with a mixed picture with regards to economic policy A key variable for IT spending in this region is economic diversification. In many markets, liberalisation in sectors like telecommunications and financial services are factors driving demand for IT products and services. The share of the non-oil sector in IT spending is expected to fall slightly in the UAE but to rise in Saudi Arabia, which accounts for 40% of regional IT spending. However, there will continue to be significant spending on new technology-driven solutions in the hydrocarbons sector. Another factor that will keep IT spending growing in this region is the waves of e-government initiatives being implemented. Government accounts for up to 40% of the IT market in some states. First-placed © Business Monitor International Ltd Page 12 Israel Information Technology Report Q1 2010 UAE continued to roll out e-services in 2009, in line with the UAE Strategic Plan, which called for a strengthening of e-government programmes. In Saudi Arabia, too, substantial budgets have been allocated for e-government infrastructure development. A number of factors contributed to the slowdown in the UAE and other GCC markets like Oman in 2009, including the impact of a falling population on consumer spending, as numbers of expats returned home. BMI expects this to be a short-term trend, however, and Saudi Arabian population growth for example is expected to reach 10% by the end of our five-year forecast period, driving IT spending. Saudi Arabia, Bahrain and Oman rank slightly behind their equally fast-growing GCC peers on grounds of general business environment, but the IT market metrics remain attractive. Saudi Arabia will continue to be a lucrative market for technology products and services, with the country’s youthful population supporting a continued rapid rise in internet, PC and notebooks penetration. BMI also takes a positive view of market performance in Bahrain over the 2010-2014 forecast period. A particularly important factor is Bahrain’s growing status as a financial hub. Oman, although, like Bahrain, one of the smaller markets in the region, should benefit from infrastructure projects in sectors ranging from tourism to ports. Of the non-GCC countries, Israel – in fourth place – should have enough momentum from key sectors to expand over BMI’s 2010-2014 forecast period. Our ratings take account of opportunities in verticals like financial services and SMEs, and growing demand for major IT outsourcing solutions. However, in 2010 rising job insecurity for those in work will have a negative impact on consumer sentiment. South Africa is one of the Middle East and Africa’s most significant IT markets in terms of size and growth potential. However, the country loses points for country structure and market risk. The market will be supported by factors such as the 2010 Football World Cup, government projects and investment by sectors such as telecoms. Projected improvement in South Africa's broadband infrastructure, and international bandwidth, will also be a growth driver. Egypt is expected to be one of the fastest-growing IT markets in the region over the next few years, but has a number of constraints, including low disposable incomes and economic disparities. The market will benefit from youthful demographics, rising PC penetration and improving ICT infrastructure, despite a sub-optimal distribution network outside of Cairo. Lebanon also has some intrinsic advantages, including a cosmopolitan and multi-lingual labour force, and a strategic position for the Levant markets. There is potential for IT vendors in sectors such as telecoms, banking, utilities, real estate and government, but much will depend on the political stabilisation necessary to implement reforms. © Business Monitor International Ltd Page 13 Israel Information Technology Report Q1 2010 Regional IT Business Environment Ratings Limits Of Potential Returns Risks To Realisation Of Returns IT Market Country Structure Limits Market Risks Country Risk Risks IT BE Rating Regional Ranking UAE 48 95 64 60 74 68 65 1 Qatar 41 100 62 50 80 68 64 2 Kuwait 44 100 64 40 76 62 63 3 Israel 45 90 61 55 69 63 62 4 Bahrain 42 80 55 58 69 64 58 5 Saudi Arabia 49 70 56 45 65 57 57 6 Oman 42 60 48 50 60 56 50 7 South Africa 53 45 50 35 54 46 49 8 Turkey 48 50 49 45 40 42 47 9 Egypt 50 25 41 40 55 49 44 10 Lebanon 42 60 48 20 37 30 43 11 Source: BMI. Scores out of 100, with 100 highest. The IT BE Rating is the principal rating. It comprises two subratings 'Limits Of Potential Returns' and 'Risks To Realisation Of Returns', which have a 70% and 30% weighting, respectively. In turn, the 'Limits' Rating comprises IT Market and Country Structure, which have a 70% and 30% weighting, respectively, and are based upon growth/size/maturity/govt. policy of the IT industry (Market) and the broader economic/socio-demographic environment (Country). The 'Risks' rating comprises Market Risks and Country Risk, which have a 40% and 60% weighting, respectively, and are based on a subjective evaluation of industry regulatory and IP regulations (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across the 14 Industries for which BMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating individually or as a composite, which the choice depending on their exposure to the industry in each particular state. For a list of the data/indicators used, please consult the appendix at the back of the report. © Business Monitor International Ltd Page 14 Israel Information Technology Report Q1 2010 Middle East Regional IT Markets Overview IT Penetration Internet Penetration BMI projects continued improvement in (per 100 population) regional ICT indicators over the next few years, driven by investment in broadband and government ICT initiatives. The Middle East divides into two groups in terms of information society development. In the first group are richer and more technologically advanced countries, such as Israel and the UAE, where internet penetration is relatively high and many households have access to broadband services. In the more emerging markets such as Egypt, on the Note: figures may differ from other sections of this report due to updated forecasts after time of writing. e/f = estimate/forecast. Source: BMI other hand, computers remain a luxury for many. The number of internet users is expected to grow significantly across the region. Qatar is projected to advance the most in percentage terms, with penetration rising from about 50% in 2008 to 78% by 2013 (note: figures may vary elsewhere in report due to updated forecasts after time of writing). Egypt will have over 23mn subscribers in that same year, up from 11mn in early 2009. The UAE is one of the most advanced states in the region in this respect, with internet penetration seen as reaching 72% within the forecast period. By contrast, Saudi Arabia is forecast to achieve a 7% rise in subscribers. Similar contrasts are apparent in relation to broadband penetration, which currently ranges from 1.2% in Egypt to 24.5% in Israel. Government initiatives are afoot in most places, ranging from wireless broadband in Dubai to plans to deploy optical fibre extensively in countries such as Kuwait. Broadband penetration is seen as being at about 25% or above in the UAE, Saudi Arabia and Israel by the end of the forecast period, but at only around 3% in Egypt and Kuwait. Internet and broadband penetration growth will receive boosts from continued efforts to liberalise regional telecoms markets. In 2008 the Qatari government announced that eight operators had submitted bids for new fixed-line licences. Egypt also continued liberalisation of its telecoms market last year, and similar moves have been seen in the Kingdom of Saudi Arabia. Broadband penetration has become a driver of PC ownership in some segments, due to the growing variety of multimedia and communication services available. There is plenty of room for PC growth, given the current low levels of computerisation, which are estimated at less than 50% in every country in the region. © Business Monitor International Ltd Page 15 Israel Information Technology Report Q1 2010 Governments in the region are allocating significant budgets for e-government development. The UAE launched several new projects in 2008, including an ID card initiative that will be a key element underpinning future information society development. Meanwhile, in June 2008 Saudi Arabia's governing Shoura Council approved a draft national strategy for the IT industry that aimed to raise the contribution of the industry to GDP to 20% by 2020. Israel has announced that it intends to make a big effort to narrow the digital divide, and there has also been spending on computers in healthcare and a nationwide paperless court initiative. Market Growth & Drivers Despite the global economic slowdown, the Middle East appears better placed than most other regions to withstand the current global economic headwinds. In GCC states, the precipitous fall in oil prices in H208 had a negative effect on spending in previously fast-growing IT spending verticals such as oil and gas, construction and real estate. Companies, hit by slowdowns in key export markets and credit tightening, were looking to cut costs. However, the region has a number of positive factors to help it avoid stagnation. There is increasing economic diversification and strong spending from non-oil sectors such as government, financial and enterprise sectors. By 2012 this should be more evident, with IT's share of GDP rising in these countries. Other drivers include fairly resilient consumer demand and ongoing infrastructure projects in major verticals such as oil and gas, telecoms and power. As a result, IT market growth is expected to remain in positive territory in most places in 2009. Youthful population IT Markets Compound Growth, (%) 2008e-2013f demographics, retail sector development and rising PC penetration will drive growth. Growing regional competition and opportunities, with the development of the Arab Free Trade Zone, will encourage spending. Several sectors will offer opportunities despite the economic headwinds. Telecoms liberalisation and a big push towards broadband penetration are e/f = estimate/forecast. Source: BMI expected to drive demand. Banks are implementing solutions to increase business flexibility and introduce new services, including Islamic banking. In Israel, spending in two of the largest IT verticals, defence and government, should be relatively immune to the economic situation. Another key area for IT spending in many countries will be healthcare, with several major projects launched. © Business Monitor International Ltd Page 16 Israel Information Technology Report Q1 2010 The highest growth Middle East & Africa (MEA) IT market over the forecast period is expected to be Egypt, with compound growth of 65% for 2008-2013. There is room for considerable growth in the country in the next few years, given the current low level of computerisation, which is much higher in the business sector than in the population at large. Other high growth markets are expected to include Kuwait (64%) and Qatar (64%). Sectors & Verticals Hardware will continue to dominate regional IT spending as the number of personal computer users rises steadily over the forecast period. This will be driven by growing affordability, government initiatives and the popularity of notebooks and netbooks. Notebook shipments grew about 50% in the Gulf last year, with notebooks the main product category driving retail segment growth, as consumer sales feel the benefits of aggressive channel promotions. The economic slowdown and credit tightening may have an impact on hardware spending in the enterprise sector, as companies look to cut costs. However, PC prices are continuing to fall, and this along with more credit availability - is bringing computers within the reach of many more people. Meanwhile, the advance of 'big box' retailing, with larger outlets offering lower prices and more choice, will also stimulate sales. Market Structure (% Of Total IT Market) 2008e (LHS) and 2013f (RHS) e/f = estimate/forecast. Source: BMI Government programmes in Egypt and Saudi Arabia have made low-price computers available in easy instalment payment schemes. Strong demand for notebooks is another key factor driving growth, although desktops remain important for SMEs and other groups. Government investment in education and eservices will mean desktop purchases for schools, colleges and government offices. © Business Monitor International Ltd Page 17 Israel Information Technology Report Q1 2010 Spending on software as a share of total IT spending is as low as 14% in Egypt and below 20% in a majority of MEA markets. Despite the difficult economic environment, which will encourage companies to focus on the bottom line, demand from the oil and gas segment was hit in H208, but BMI predicts plenty of room for growth over the forecast period as numerous untapped sectors still exist. Key verticals will include telecoms, finance, retail, healthcare and the public sector. SMEs are likely to lead spending growth, with manufacturing and trading firms seeking efficiencies by making the transition from manual environments to full automation of back-office systems. Customer relationship management (CRM) will be a growth area, as fewer than 2% of SMEs in the Middle East region have a specialised CRM application in place. Other high-growth categories are set to include business intelligence, storage and security products. Security software is a growing opportunity, with the UAE currently the largest market. There are some challenges for the regional software market. One key issue is that of illegal software: across the region up to 80% of software is counterfeit. Another important factor is of course low income, and the high costs of operating systems such as Windows, which has led to activity to promote open source in countries such as Egypt, championed by IBM and other vendors. BMI predicts that IT services will remain in positive territory during the 2008-2013 period. However, the economic situation is likely to have an effect in some key verticals, particularly real estate and oil and gas. In H208 there were reports of IT managers in various sectors looking to cut costs, although in some cases the emphasis was more on scaling back projects rather than cancellation. In the government sector, budgets have often already been commissioned, and so the effects are more likely to be felt in the second half of 2009 and in 2010. Currently, IT services' share of IT spending ranges from around 24% to 32% in the MEA countries covered by BMI. Support and maintenance account for around one-third of spending on IT services, but demand for more complex services has increased, with large outsourcing deals in the UAE, Israel and elsewhere. There is also demand for services such as hosting, facilities management and disaster recovery. Even in less mature markets such as Egypt, larger customers are becoming more demanding in terms of their IT expectations. © Business Monitor International Ltd Page 18 Israel Information Technology Report Q1 2010 Market Overview Government Authority Government Authority Ministry of Science, Culture and Sport Minister Ghaleb Majadele The Ministry of Science, Culture and Sport was established in 1982 as the Ministry of Science and Development; it has undergone numerous name changes, receiving its current name in 2006. The responsibilities of the ministry are the formation of a national policy towards science and technology, technological analysis and organisation, and the co-ordination of research areas. The main priorities for the Ministry of Science, Culture and Sport are as follows: ƒ Setting up a national policy and priorities for research and development (R&D); ƒ Development of scientific and technological infrastructure; ƒ Establishment and strengthening of foreign scientific relations; ƒ Participation in the establishment of research centres, including regional R&D centres; ƒ Participation in the development of scientific and technological human resources; ƒ Increasing awareness of science within the public, especially the youth of Israel; ƒ Developing digital infrastructure (facilitating access to information); and ƒ Consulting the government and its offices in the area of science and technology. Background All the major vendors have a direct presence in Israel, employing substantial numbers of staff. For example, IBM has its only IBM Global Services (IGS) regional subsidiary in Petach Tikva and employs around 2,000 staff at its Haifa Labs and various IBM facilities in Rehovot and Jerusalem. HP has as many as 4,000 employees and has long offered 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. Together with the opening up of the financial © Business Monitor International Ltd Page 19 Israel Information Technology Report Q1 2010 and telecoms sectors, the high-tech sector succeeded in attracting large FDI flows. The government's policy made foreign high-tech companies eligible for government grants covering 38% of the cost of new R&D 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 between 40% and 50% of their revenues. Government Initiatives Gov@Net - Government intranet ƒ A cross-government intranet planned to connect over 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 ƒ 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 ƒ This project will create a unified language for cross-government activities Government EIP ƒ 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 (see Industry Developments), from ministry-specific operational systems and from intra-government shared resources Tehila - Government ISP ƒ The Government ISP (GISP) project has been operational since 1998, providing essential infrastructure for public-government communication ƒ To date, 60% of the governmental bodies have voluntarily joined the project Shoham - E-commerce infrastructure and service ƒ A central e-commerce service allowing citizens and companies to access a uniform interface to carry out a variety of payments and purchases, which includes 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 over ILS250mn in its first year Lehava project ƒ Group of initiatives to help close digital divide Hardware The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is projected at US$2.2bn in 2010, up from US$2.1bn in 2009. The market is expected to grow at a CAGR of 5% over the forecast period to reach US$2.7bn in 2014. Spending is expected to resume single-digit growth in 2010, after a contraction in 2009 due to the economic slowdown and unemployment hitting consumer demand for electronics goods. © Business Monitor International Ltd Page 20 Israel Information Technology Report Q1 2010 Household consumption moved into negative territory last year, with spending on household equipment down by 6.7% in Q109, and although BMI forecast a slight recovery in H209, trading conditions were expected to remain tough. Businesses are expected to maintain a cautious attitude to IT investments in 2010 due to uncertainty about a sustainable global economic recovery, but there should still be growth areas. Retail computer spending had been buoyant in the two years preceding the economic downturn, with drivers including the strong shekel, higher broadband penetration and demand for multimedia applications. In H109, the PC market slowed, through a combination of reduced consumer and business confidence. Government IT project investments are a major component of Israeli computer hardware demand, but tighter fiscal conditions for the new administration in 2009 placed some budgets under pressure. There could be a boost, particularly in the second half of 2010, from computer hardware tenders delayed from 2009. The launch of the Windows 7 operating system, in October 2009, has the potential to help trigger a new cycle of hardware upgrades, although much will depend on business and consumer confidence. Notebooks will remain the main growth area, although the share of netbooks in total notebook sales may have peaked as the price differential compared with full-featured notebooks becomes less significant. These factors were apparent in H208, but because of the upwards trend in the first half of the year, total 2008 PC sales were still up overall, at around 439,000. One area of growth will be lower priced minicomputers, netbooks, which are establishing a position in the market. The current low rate of PC penetration represents potential for organic growth. PC penetration was only 26.4% in 2005, while digital divide issues mean that Israel currently has 600,000 children living below the poverty line, only 3% of whom have internet or home PC access, compared with 90% in the top income group. The Israeli government has launched various initiatives to increase computer and internet penetration, including Computer for Every Child, Window to Tomorrow's World, Tapuah (The Israeli Society for the Advancement of the Information Age) and others. The level of support, however, has been criticised by some industry insiders as too low. The Israeli IT market is relatively mature, but hardware still accounts for around half of the total market, excluding communications hardware. Notebooks are the fastest growing segment of the market, but in 2008 desktops still dominated with around two-thirds of unit sales. Despite strong growth in demand for notebooks, the desktop sector is still significant, largely to business and government end-users. © Business Monitor International Ltd Page 21 Israel Information Technology Report Q1 2010 Software Israeli software spending is projected at US$1.0bn in 2010, up from US$973mn in 2009. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period. In recent years, the SME segment, the mainstay of the Israeli business sector, has emerged as an important growth area. Spending on enterprise solutions should continue to grow steadily, with reviving or emerging areas of opportunity including security, CRM solutions and business intelligence. However, in the current economic climate, vendors will continue to pitch the efficiency gains potentially offered by these applications. A 2009 survey of IT managers suggested that current areas of high demand include management of Microsoft systems and servers, as well as systems management, basic data management, firewalls, ERP implementation and CRM. CRM is a particularly buoyant area, with local IT company Matrix reporting a number of public- and private-sector successes in 2008, while customers for Microsoft's Dynamics CRM platform include Israeli health maintenance organisation (HMO) Maccabi Healthcare Services. The release of the Windows 7 operating system, in October 2009, has the potential to impact positively on sales in 2010, despite business caution. 2010 should in any event see a boost from systems upgrades deferred from last year when the economic crisis had an impact in public and private sectors. The slowdown was expected to continue into H209, with companies deferring investments, or looking for 'good enough' solutions to immediate problems. Vendors will need to convince enterprises of benefits to the bottom line from software investments; however, there should still be several growth areas. The security software segment is an important opportunity, projected to be worth tens of millions of dollars. Israel has become more aware about the growing threat and sophistication of cyber attacks and has been encouraging government and private-sector organisations to take action. Spending is likely across all sectors, with security content and threat management the current priorities. In terms of verticals, the financial sector has been a mainstay of demand, with other key areas including defence and healthcare. These three sectors are likely to be somewhat immunised against the consequences of the global slowdown. Despite the current financial crisis, regulatory compliance and demand for new services will continue to drive IT spending by banks. Similarly, defence spending on new systems is likely to be maintained given the current security situation. Software comprises an important part of Israel's industrial production and exports, with software exports of around US$3bn being comparable to about two-thirds of the entire value of the domestic IT sector. Almost all global vendors are active in the domestic market, selling licences, along with integration and applications services. Global vendors control more than three-quarters of the market, with SAP in first place. In the past, the Israeli SME segment was dominated by local software companies. Now, © Business Monitor International Ltd Page 22 Israel Information Technology Report Q1 2010 international players, including market leaders like SAP and Oracle, are entering with appropriate software packages. Microsoft is also designing a software package for this market segment. Services The IT services segment is estimated at US$1.6bn in 2010, and this is expected to grow at a CAGR of 7% over the forecast period to reach US$2.2bn in 2014. The relatively robust economy and increased investment by a number of key sectors have driven recent growth, but the number of new projects decelerated in 2009 owing to the economic slowdown. In H109, there were reports of IT managers scaling back projects, but, in the near term, budgets had often already been commissioned, and so the effects were more likely to be felt in H209 and 2010. Defence and government spending represent a significant component of Israeli IT demand and have some immunity to economic vicissitudes. This year much will depend on the speed of global economic recovery, particularly in key Israeli export markets. However, vendors will have to adapt to an environment where some projects are commissioned more in response to immediate needs, and with a focus on cost reduction. Growth is expected to reach a higher trajectory in the second half of our five-year forecast period. Key Israeli IT services spending verticals include the financial sector, where international regulatory compliance and structural and market reforms have driven substantial IT investment. The sector accounts for around 25% of total IT services spending, while the government accounts for another quarter. Along with defence, these two key sectors are likely to be a continued source of opportunities because the factors driving spending in each case are not particularly sensitive to economic downturn. Indeed, the new administration will likely feel pressure to ramp up government spending to combat lower private consumption and rising unemployment. Another key area of opportunity is healthcare IT. While large organisations still dominate, SMEs have also 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. Similar factors are driving an increase in demand for managed services, with businesses reluctant to invest in internal IT capabilities, or deterred from doing so by a lack of available skills. Outsourcing Outsourcing has become a bigger factor and was estimated to account for about 20% of IT services spending, or at least US$300mn, in 2009. Key sectors for IT outsourcing include: ƒ The military, with outsourcing deals such as that awarded to HP by the Israeli Navy for management of its IT infrastructure highlighting the opportunities there. While the value of the HP deal was not made public, it is estimated to be worth several million shekels. © Business Monitor International Ltd Page 23 Israel Information Technology Report Q1 2010 ƒ The financial sector is another lead vertical for outsourcing. In 2006, an outsourcing deal between First International Bank of Israel and EDS Israel was the largest outsourcing contract in the Israeli banking industry and a milestone at the time. Tata Consultancy Services' decision to open a local branch also underlines the potential attraction of the financial sector, now benefiting from economic recovery and greater security. ƒ The retail sector offers further opportunities, with IBM Israel having a 10-year outsourcing contract with Clubmarket Marketing Chains, with the contract including computer systems for the supermarket chain's branches and point-of-sale terminals. 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 in the past. Aside from Israel's small size, another issue is security. However, the government is now actively promoting Israel to multinationals, and there has been a spate of call-centre construction. The work seems to be paying off, with Israel starting to emerge as a desirable location for packaged applications and localisation services. Industry Developments IT is an important element of the Israeli government's socio-economic policy framework for 2008-2010. The National Economic Council recently submitted a policy agenda to the government, which specified two main policy tracks of reducing poverty and achieving balanced growth. The first track is expected to emerge as the main priority for the government. The digital divide is both a symptom and an aggravator of relative poverty. Economic Impact On Israel Tech Sector In H109, Israel's high-tech sector continued to suffer the effects of the global economic slowdown and credit crunch. Demand for high-tech exports was estimated to have dropped by at least 10-15% with as many as 10,000 sector jobs feared to be at risk this year. This represents a major concern for the Israeli government given that high-tech accounts for around 10% of Israel's economy, with annual sales estimated at around US$25bn. The high-tech industry directly employs around 7% of the country's work force, and 6-8% have been estimated to have been laid off since last October. In 2009, some major IT firms were laying off staff in Israel, including SAP, or cutting salaries, like HP. Israel's high-tech merger activity also fell in 2008 as a result of the downturn in the global economy. According to figures from Israel's Venture Capital Research Centre (JVC), the value of Israel high-tech mergers were down by 19% year-on-year (y-o-y) to US$2.64bn. The average deal size was also down, to around US$31mn. An even more striking development was that the whole year passed without a single © Business Monitor International Ltd Page 24 Israel Information Technology Report Q1 2010 high-tech initial public offering (IPO), a first since 2003. This was due largely to the weakness of the global capital markets, which affected, not just investment banks, but also venture capital. However, the number of Israeli tech companies involved in mergers was just one down on the 2007 figure, at 84 companies, indicating that the supply of promising companies has not dried up. Indeed, current low valuations represent an opportunity for investors, although JVC forecasts that Israel high-tech companies will raise only US$300mn this year, down by 62% compared with last year. Israel's Digital Divide It has been estimated that Israel currently has around 600,000 children living below the poverty line. The Gini coefficient has been estimated as among the highest of any Organisation for Economic Co-operation and Development (OECD) country. A 2007 survey found that only 30% of children living in poverty have internet or home PC access compared with 90% in the top income group. Alarm at such statistics has helped to make tackling the digital divide central to the government's key policy goal of reducing poverty. There is also an ethnic dimension to digital inequalities. Recent research by the University of Haifa showed a consistent gap in internet access between Jews and Arabs, with 72.5% of Jews in Israel using the internet compared with 52.5% of Arabs. In order to deal with the digital divide problem, the following measures have been proposed: ƒ A senior minister for the high-tech sector should be appointed to co-ordinate activities currently carried out by various ministries. The minister should prepare a master plan for government policy in the information industry; ƒ Regulations should be amended to facilitate rapid investments in communications, technological infrastructure, bandwidth and fast internet backbone; ƒ Massive investment should be made in the educational system for training information workers; and ƒ Aid to be given to the less wealthy to make them part of Israel's information industry. Leveraging IT For Growth IT will also be harnessed to the second goal of achieving balanced, long-term growth. Israel's software sector has long been one of the country's economic pillars and a magnet for inward investment. Recently released figures underlined that IT represents a crucial part of Israel's economy. The Israeli Association of Electronics and Software Industries (IAESI) projected that the software sector will generate US$3.2bn annually by the end of the decade. According to recent figures, electronics and software © Business Monitor International Ltd Page 25 Israel Information Technology Report Q1 2010 exports had already reached US$1.87bn in 2006. The government is hoping that the high-tech sector will generate US$3.0bn for the nation's economy by 2010. Offshoring Israel is also working hard to ensure that it benefits from the global offshoring trend, which it sees as an area of potential. Despite the political and security situation, Israel has marketed its IT skills with some success, and attracted outsourcing operations from major IT corporations such as Intel, IBM and Microsoft, as well as Motorola. One factor in this, of course, has been incentives that the Israeli government started to offer back in 2006, with subsidies of up to ILS1,000 per employee per month. Several major public- and private-sector outsourcing deals have also highlighted the growing importance of outsourcing. However, there are fears of a skills bottleneck. In 2007, the government said that Israel hopes to produce 10,000 engineers a year by 2010, up from the present graduation rate of 4,900 - small numbers by the standards of China, India and the US, but a big challenge for Israel. The number of jobs in the sector rose to around 61,000 in 2006, according to the government's Central Bureau of Statistics. Engineering salaries in Israel are about half those in the US but double those in India. E-Services As part of its modernisation agenda, the government is also pressing ahead with various other strands of its e-government project. The 2005-2007 masterplan of the government's ERP project called for implementation in around 90 government units by the end of 2007. The project leveraged mySAP ERP (content delivery software) and had a focus on financial, logistics and human resource components. Dubbed Merkava, the project has cost an estimated ILS800mn since its launch in 1999. At the beginning of 2007, about 40 government units and more than 3,000 users were estimated to have been covered. Among other initiatives, there has also 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 last year with Dell and HP. The government chose Microsoft search technology to power its government services portal, gov.il. Meanwhile, the Israeli government was progressing with its plans to roll out Smart ID card systems intended to cover the entire population. With an urgent need for the government to update technology and strengthen authentication systems, the original target was to introduce 2.5mn smart ID cards. In December 2008, HP was awarded a contract to produce 5mn ID cards; however, it is yet to receive the go-ahead from the Knesset, which is deliberating over the passing of the biometric database bill. The ID cards, set to cost Israel US$67.49mn, would use 'smart' identification methods involving fingerprints and digital photography. © Business Monitor International Ltd Page 26 Israel Information Technology Report Q1 2010 Industry Forecast Scenario BMI projects that the Israeli IT market will have a value of US$4.9bn in 2010, with a return to singledigit growth following a sharp deceleration last year. The market is forecast to reach a projected US$6.2bn in 2014. The Israeli IT market should have enough momentum from key sectors to expand over BMI's 2010-2014 forecast period, thanks to stable demand from defence and government sectors, and opportunities in verticals like financial services and SMEs. 2010 Outlook Spending is expected to resume single-digit growth in 2010, after a contraction in 2009 due to the economic slowdown and unemployment hitting consumer demand for electronics goods. Businesses are expected to maintain a cautious attitude to IT investments in 2010 due to uncertainty about a sustainable global economic recovery, but there should still be growth areas. Major IT vendors reported challenging trading conditions in 2009; some, such as Dell and HP, made retrenchments, while others, such as Cisco, reportedly delayed local investment plans. The US and global slowdown in tech demand hit several large vendors, with Ness Technologies among vendors reporting annualised falls in quarterly profits. There were reports from vendors of IT budget cuts. IT managers were looking to cut costs, and some projects were scaled back in key sectors for IT projects. Other vendors reported continuing opportunities, with fellow local giant Matrix managing to increase both local revenues and profits in H109. However, BMI tentatively expected conditions to improve the final quarter of the year with a seasonal upturn reinforced by procurements deferred from the first half of the year. In 2010 there could be a boost, particularly in the second half of 2010, from computer hardware tenders delayed from 2009. The launch of the Windows 7 operating system also has the potential to help trigger a new cycle of hardware upgrades next year, although much will depend on business and consumer confidence. Market Drivers The Israeli IT market has a number of positive fundamentals, which should keep it in positive territory during BMI's five-year forecast period. Low computer penetration of around 30% offers potential for continued growth. High internet penetration and growing broadband penetration are drivers for the retail segment, along with interest in multimedia and mobile computing applications and the new popularity of mini-computers. In 2009 a key factor was unemployment hitting consumer demand for big-ticket electronics goods, with real private consumption growth projected to be negative at -2% in 2009 and just 1% in 2010. In Q109, spending on household equipment dropped by 6.7%. In H209 rising job insecurity for those in work is © Business Monitor International Ltd Page 27 Israel Information Technology Report Q1 2010 expected to have a negative impact on consumer sentiment, while many companies facing tight credit conditions will continue to be cautious on IT budgets. However, spending by a number of key IT spending verticals such as defence and financial services are to some extent insulated from economic vissitudes. Regulatory compliance will continue to necessitate IT spending by banks. The financial services sector accounts for about 15% of Israeli IT spending. Sectors Another 50% of IT spending is accounted for by government and military projects, which will have a relatively low sensitivity to economic downturn compared with the commercial sector. Government IT and digital-divide initiatives are important sources of opportunity for vendors, with recent projects ranging from government e-services portals to healthcare. The government remains determined to preserve this country's status as a high-tech powerhouse and drive 'knowledge economy' development. While the defence sector is, and is expected to remain, the single most important vertical, investments by financial-sector organisations should mean more large outsourcing deals, such as the 2006 contract win by EDS from the First International Bank of Israel (FIBI). Other sectors of opportunity will include healthcare and telecoms, as well as infrastructure, transport and the small office/home office (SOHO) sector. Opportunities As a result of this activity, IT services are expected to display the highest growth over the forecast period. Growing enthusiasm for outsourcing is putting Israel on the map, with some recent large tenders such as HP's contract for outsourced management of the Israeli navy's IT infrastructure. The economic slowdown may reinforce this trend in some respects. Israel is also emerging as a location for some business process outsourcing (BPO) functions helped by government incentives. However, much depends on there being a sustained improvement in the economy, as well as the overall political environment. While large organisations still dominate, SMEs have also 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. Summary In summary, although the Israeli economy is vulnerable to the global economic slowdown, BMI believes that it has sufficient strength in key demand verticals to partly offset these downward pressures. The hardware market is forecast to grow from an estimated US$2.2bn in 2010 to US$2.7bn in 2014, with computer sales projected to rise from an estimated US$1.8bn to US$2.2bn. Over the period, software spending is expected to increase from an estimated US$1.0bn to US$1.4bn and services from an estimated US$1.6bn to US$2.2bn. © Business Monitor International Ltd Page 28 Israel Information Technology Report Q1 2010 Israeli IT Industry - Historical Data & Forecasts (US$mn, unless otherwise stated) IT Sector, Q1 2010 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f IT market (US$mn) 4,428 4,826 4,633 4,865 5,108 5,363 5,739 6,198 IT market as % GDP 2.7% 2.4% 2.5% 2.4% 2.5% 2.5% 2.5% 2.6% Hardware (computer market sales) (US$mn) 2,125 2,317 2,131 2,211 2,294 2,379 2,514 2,680 Services (US$mn) 1,417 1,544 1,529 1,621 1,719 1,824 1,971 2,150 Software (US$mn) 886 965 973 1,032 1,094 1,160 1,254 1,368 1,679 1,853 1,726 1,791 1,863 1,951 2,082 2,219 191 208 192 199 206 214 226 241 PCs (including notebooks) (US$mn) Servers (US$mn) f = forecast. Source: BMI. ITU (Internet and broadband penetration © Business Monitor International Ltd Page 29 Israel Information Technology Report Q1 2010 Internet Table: Internet Data & Forecasts No. of internet users ('000) No. of internet users/100 inhabitants No. of broadband internet subscribers ('000) No. of broadband internet subscribers/100 inhabitants 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f 4,100 4,240 4,421 4,580 4,657 4,713 4,768 4,804 57.2 59.1 61.9 63.8 64.5 65.3 66.1 66.1 1,359 1,492 1,625 1,754 1,880 2,000 2,103 2,195 18.9 20.8 22.6 24.5 26.2 27.8 29.2 29.2 e/f = BMI estimate/forecast. Source: International Telecommunications Union (ITU), BMI 2007 saw y-o-y growth of 9.8% in the number of broadband subscribers in Israel, and we estimate that the growth Industry Trends – Internet Sector 2003-2013 rate for 2008 is a slightly lower 8.9%, taking the number of subscribers by YE08 to 1.6mn. With broadband penetration already over 20%, the growth rate will drop off gradually over the next five years, with 4.4% y-o-y growth predicted for 2013. Israel's strong broadband growth has long relied on a handful of developments across the market. These include the competition between Bezeq and the cable companies, e/f = estimate/forecast. Source: BMI with five major internet service providers (ISPs) vying for market share from both the corporate and residential markets, which enjoy high PC penetration rates, advanced telecoms infrastructure and minimal regulatory intervention. The availability of VoIP services is likely to fuel further demand, as consumers seek to take advantage of cheap international and national calling rates. Another development likely to stimulate growth is the introduction of local loop unbundling (LLU), which will give alternative operators access to Bezeq's network and will stimulate much greater competition. LLU is due to be implemented by YE09. By the end of 2013, we forecast a penetration rate of almost 30%, putting Israel in line with some of the world's most developed broadband markets, such as Western Europe and the US. Bezeq is likely to remain the dominant force in the broadband market, although it will face increasing levels of competition. © Business Monitor International Ltd Page 30 Israel Information Technology Report Q1 2010 At the end of June 2008, Bezeq had 982,000 broadband subscribers, putting its market share at around 62%. Israel's high PC penetration and the growing availability of broadband access means that internet penetration is likely to continue its upward trajectory. Internet use is already widespread, with the ITU estimating that over 50% of the population used the internet by the end of 2005. We forecast internet penetration to rise slowly but steadily over the next five years, reaching 66% by the end of 2012. Country Context Consumer Expenditure, 2000-2012 (US$) 2000 2007 2008e 2009f 2010f 2012f Consumer expenditure per capita 9,998 12,148 13,693 14,610 14,950 16,598 Poorest 20%, expenditure per capita 2,849 3,462 3,902 4,164 4,261 4,731 Richest 20%, expenditure per capita 22,445 27,273 30,740 32,800 33,563 37,263 Richest 10%, expenditure per capita 28,793 34,988 39,435 42,078 43,056 47,803 Middle 60%, expenditure per capita 8,231 10,002 11,274 12,029 12,309 13,666 12,993 17,451 18,074 na na na Poorest 20%, expenditure per capita 3,703 4,973 5,151 na na na Richest 20%, expenditure per capita 29,168 39,177 40,576 na na na Richest 10%, expenditure per capita 37,418 50,258 52,053 na na na Middle 60%, expenditure per capita 10,697 14,368 14,881 na na na Purchasing power parity Consumer expenditure per capita e/f = estimate/forecast, na = not available. Source: World Bank, country data, BMI Rural/Urban Breakdown, 2005-2030 2005 2010f 2020f 2030f Urban population, % of total 91.7 92.0 92.2 93.0 Rural population, % of total 8.3 8.0 7.8 7.0 6,168 6,731 7,626 8,524 557 584 643 637 6,725 7,315 8,269 9,161 Urban population, total, '000 Rural population, total, '000 Total population, '000 f = forecast. Source: UN Population Division © Business Monitor International Ltd Page 31 Israel Information Technology Report Q1 2010 Competitive Landscape Leading IT services vendors, including Israeli companies Ness Technologies and Matrix and US firm IBM, experienced mixed fortunes in the Israeli market in 2009. Israel's domestic IT service giants have strong advantages owing to local knowledge and contacts. Despite their global ambitions, Israel remains an important market for these companies and typically accounts for 40-50% of revenues. The Israeli IT services market is competitive, with no vendor enjoying a share of more than around 15%. Meanwhile, leading multinational competitors IBM and HP are both estimated to have Israeli IT services market shares of below 10%. Matrix, the Israeli IT services market leader, reported some continuing successes in the Israeli IT market in 2009, despite the challenging economic climate, with wins in a number of key sectors including healthcare, financial services, defence and government. In Q309 Matrix reported 100% annualised growth in net profits, and 7% growth in operating profits on flat revenues growth. Revenues from core business in the software and solutions sector grew by about 10%. Matrix also chalked up successes in 2008, including winning an ILS20mn project to implement a CRM system at long-time customer Bezeq and a number of public-sector CRM projects. Other strong sectors in H109 included defence, communications, with at least two major wins, and industrial. Ness Israel, by contrast, reported a 19% decline in y-o-y decline in revenues in Q309, with net income also down, by a massive 91%. This followed a 20% decline in revenues for Q209, although more than half of this headline decline was due to currency translation from non-dollar revenues. The steepest declines in H109 were experienced by the company's Systems Integration and Application Development division, while Software Product Engineering continued to perform well. In 2008, the company reported record revenues despite the global economic headwinds. Ness Israel reported 18.7% top-line growth y-o-y to a record US$664.8mn. Ness's defence and homeland security business performed particularly well, demonstrating the relative immunity of these sectors to economic downturn, with some major tenders including for a fighter jet cockpit-based intelligence system. However, Ness admitted that its NessPro Israel Software Distribution house had been affected by the bad economy. Among local tenders won in 2008 was a contract from Israel's Ministry of Construction and Housing valued at US$7mn. Despite the success of several strong local vendors, a share of government tenders is won by international players. Recent tender winners include Dell and HP, whose local suppliers have a contract to supply desktops and laptops to the government. The government receives favourable prices under the terms of the agreement, which include a strong service element. Despite Intel's substantial presence in Israel, the tender did not include Intel processors, but instead those of AMD. The national smart ID card project has © Business Monitor International Ltd Page 32 Israel Information Technology Report Q1 2010 also been an important area for major IT vendors such as IBM, HP and Sun, with 11 different vendors involved at various stages since 2001. A number of multinationals are well embedded in the Israeli market. Following the recent merger with EDS, HP is expected to take around 10% of the Israeli IT services market this year. HP Israel's software division hosts HP's biggest research and development (R&D) centre worldwide, and the company also has significant production facilities in Israel. With a total of around 5,000 employees, HP reported computer sales of around US$850mn in 2007. However, as a result of the economic slowdown, HP announced in March 2009 that it was shutting down several wide digital printer production lines at its HP Indigo plant in Kiryat Gat. Another foreign investor rumoured to be contemplating cutbacks in Israel resources this year was European software giant SAP, which has around 900 employees in the country. SAP announced early in the year that it was to dismiss 6% of its global workforce. However, other foreign investors are continuing to invest. IBM Global Services is increasing its local investment, and in 2008 it announced that it was establishing a new systems and technology group lab in Israel. The new R&D facility focuses on storage and microchip technology solutions, and follows IBM's acquisition of several IT storage solutions start-ups. Meanwhile, Dell reportedly accepted an invitation from the Israeli government to establish a new R&D and business centre in Jerusalem. In 2008, IBM announced a co-operation agreement with Retalix to develop an integrated management solution for grocery and convenience store retailers. IBM's clients in the retail sector include supermarket chain Clubmarket, with which IBM has an ILS100mn outsourcing contract. EDS Israel, which employs more than 900 people, has won contracts from many organisations including the Ministries of Health, Transport and Education and an estimated US$80mn deal with ECI Telecom. In 2009, enterprise software giant Oracle was in discussion with Israel Credit Cards Cal (ICC-Cal) concerning a major computerisation project being implemented by Oracle. Oracle initiated the project, to replace and upgrade ICC-Cal's computer systems relating to credit card management 18 months ago. However, differences had apparently arisen between Oracle and ICC-Cal, which is jointly owned by Israel Discount Bank and First International Bank of Israel, concerning the project. In 2008, Oracle rival SAP reached an agreement with Ness to purchase the latter's SAP Sales and Distribution division in Israel. The acquisition was in line with SAP's focus on enhancing direct operations in Israel and other high-growth Middle Eastern markets. SAP implementations are a major IT services category in Israel, and SAP aims to be closer to its customers and partners. However, SAP will continue to work with Ness as a systems integrator, and Ness will also retain its SAP Academy training © Business Monitor International Ltd Page 33 Israel Information Technology Report Q1 2010 centre. In Q109 Ness completed an ILS80mn municipal taxes and water billing and collection project for the Tel Aviv Jaffa municipality, based on SAP solutions. Microsoft Israel has an annual turnover of around US$1bn. In 2010, Microsoft hopes that sales of its Windows 7 operating system, launched in October 2009, will boost its sales. In Summer 2009 Microsoft continued to lay the groundwork for the new operating system launch and released the enterprise version of the software in August. Microsoft anticipated that support from leading PC makers would underpin success for the new system, despite some caution from businesses. Due to the economic downturn, in H109 Microsoft laid off 50 of the approximately 600 workers at its Israeli R&D centre. In 2008, Microsoft won a substantial CRM tender from Leumi Card, estimated at around ILS15mn. Microsoft will co-operate with Matrix to specify and implement a Microsoft Dynamics CRM 4.0 solution. Microsoft has a number of other high-profile clients for its CRM solutions, including leading Israeli HMO Maccabi Healthcare Services which deployed a CRM system based on Microsoft's Dynamics CRM platform. Other local clients include Super-Pharm Israel, the leading drugstore chain, and Tehila, a division of the Israeli Ministry of Finance, which provides IT services for the government of Israel. In 2007, Microsoft sold 450,000 Windows XP and Vista operating systems in Israel, of which 40% were Vista. While US companies often have a long history in Israel, the major Indian vendors such as Satyam Computer Services and Tata Consultancy Services have built their presence in the Middle East over the past few years. Tata opened an Israeli office in 2006. Satyam has also experienced strong growth in the Middle East region and is looking to grow its consulting and outsourcing businesses by 100% over the next few years. Internet Competitive Landscape Once again, Israel tops the regional broadband penetration rate and retains the second-most developed broadband market in the Asian continent, behind South Korea. At end-2005, Israel's household penetration rates stood at 65%, against South Korea with 75%. Following in Israel's footsteps is Bahrain. The Kingdom has increasingly focused on raising take-up of ADSL services through various promotions, such as reducing tariff prices by as much as 50%, and projects involving greater network roll-outs. However, the bulk of the MEA region is underdeveloped, with penetration rates under 2%, largely as a result of high tariffs for broadband services, where many operators in the region have a near monopoly in dictating prices. Moreover, with many ISPs leasing lines from these incumbent operators, they are in turn also charged high rental prices, which are passed on to the end-user. Israel experienced dramatic growth in the number of internet users in recent years, with penetration rising from around 17% in 2000 to 56.4% in 2005. BMI estimates that the penetration rate had risen to 61.9% at end-2008. © Business Monitor International Ltd Page 34 Israel Information Technology Report Q1 2010 Macroeconomic Forecast 2010 Growth Forecast Up, Rate Hike Likely Israeli quarterly GDP figures continue to impress, and we have raised our forecasts slightly on the back of strong consumer spending figures. With the economy recovering robustly from its brief recession, we expect monetary tightening to accelerate in 2010. Another strong quarterly growth figure for Q3 confirms our view that Q2's exit from recession was the start of a broad-based recovery in the Israeli economy. While preliminary Q3 figures fit broadly with our macro view, private consumption growth has surprised slightly to the upside and we have revised our overall 2009 real GDP estimate up to -0.1% (from -0.9%), and our 2010 figure to 2.6% (from 2.4%). In line with our view, the Bank of Israel (BoI) raised interest rates at its November meeting, and we expect monetary tightening to gather pace during 2010 as worries about inflation overtake growth concerns. Growth should stabilise in 2011; indeed, there is even a risk of a slight slowdown, in line with our US view, although for now, we are forecasting an expansion of 2.7%. The Recovery Accelerates Real GDP growth in Q3 came in at 2.2%, on a seasonally adjusted annualised basis, up from 1.0% in Q2 and -3.2% in Q1. Looking at GDP by expenditure, growth was positive across the board, with exports and imports soaring, by 21.8% and 61.9% annualised respectively. Although somewhat erratic, the recovery in exports has been in play since May. By October, y-o-y growth in exports (in value terms) had shot back into positive territory, coming in at 23.9%. For 2009 as a whole, we still believe that exports will decline in real terms, but growth will resume in 2010. We have pencilled in a 3.0% expansion, with high-tech goods likely to remain the key driving force. The sharp improvement in the import picture (as a component of GDP) is more interesting, and coincides with a pick-up in private consumption. At the time of the Q2 growth announcement, we said that 'the main source of our concern is that imports remain negative, suggesting that consumer confidence still has plenty of room for improvement'. That has changed on two fronts. Firstly, figures for Q2 have been revised up; private consumption from 4.4% to 8.1% annualised, and imports from -6.3% to 4.8%. Secondly, growth in both components accelerated in Q3: private consumption to 8.9% and imports to the aforementioned 61.9%. Of particular note is the strong recovery in purchases of durable goods. Per capita consumption in this category was up by 10.9% q-o-q, and by 51.5% in annualised terms. This suggests that consumers are becoming more confident, even though we are expecting Q3 unemployment figures to show another increase (in Q2, seasonally adjusted unemployment figures rose from 7.6% to 8.0%). However, with gross fixed capital formation (GFCF) now picking up again - growth came in at 23.2% annualised in Q3 - © Business Monitor International Ltd Page 35 Israel Information Technology Report Q1 2010 unemployment could peak in Q409 or Q110, and we are forecasting a small improvement by the end of 2010. Government Spending To Remain Key We see growth in investment spending remaining in positive territory in 2010, expanding by 4.0% in real terms, although this is still down on pre-credit crunch levels. Although Israel's banks have come through the credit crunch relatively unscathed (no major bank has failed or required government intervention), and have virtually no exposure to Dubai's debt problems, we still believe that lending levels will remain fairly subdued by historical standards. This will constrain investment spending by firms, which have also proved reluctant to increase their debt levels. Figures from the central bank reveal that business sector debt was lower in September 2009 than at the end of 2008. In light of this restrained outlook, we are forecasting government expenditure to be the largest contributor to real GDP growth in 2010, accounting for 1.0 percentage points of the 2.6% headline figure. We analyse government spending in more detail in Fiscal Policy, but suffice to say, the 2010 budget will continue the fiscal stimulus programme that got underway in 2009. Spending growth will begin to slow down in 2011 as these programmes come to an end, and other sources of growth take over. Recovery Supports Rate Hikes Rising consumer spending on durable goods is likely to have been encouraged by Israel's low interest rate environment, given that the BoI's headline rate remained below 1.00% between March and November. However, rates were raised in September, to 0.75%, a move that we said was the start of a long-term tightening cycle, and indeed, the BoI raised rates again to 1.00% at the end of November, following Q3's strong growth figures. Before the November meeting, we argued that the improving growth outlook and relatively high inflation rates (CPI came in at 2.9% y-o-y in October, at the top of the central bank's 1.0-3.0% target range) would lead to more monetary tightening. We maintain this view, and expect the tightening cycle to accelerate in 2010, with a year-end headline rate target of 3.5%. This may prove slightly hawkish, but we are of the view that the sub-1.0% interest rate was adopted against a backdrop of deep financial and economic crisis. That is clearly no longer the case in Israel, and will become less so as we move through 2010 and into 2011. Risks To Outlook The main risk to our positive outlook for Israel is a double-dip scenario. This would not necessarily mean a return to recession, but there is a danger that growth could dip in 2011. We are forecasting this to happen in the US, where we see real GDP growth dipping from 2.4% in 2010 to 1.8% in 2011 as government spending eases off. This could play out in Israel, given our expectation for an easing of fiscal stimulus measures by 2011, not to mention Israel's exposure to the US economy. © Business Monitor International Ltd Page 36 Israel Information Technology Report Q1 2010 Table: Israel – Economic Activity, 2006-2014 2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f 640.8 673.6 714.3 737.3 777.8 817.2 855.0 895.8 936.4 143.9 164.2 199.1 190.5 202.0 206.9 213.8 229.7 246.4 5.2 5.3 5.5 -0.1 2.6 2.6 2.6 2.8 2.8 20,220 22,664 27,014 25,411 26,496 26,682 27,105 29,127 31,246 7.1 7.2 7.4 7.5 7.6 7.8 7.9 8.0 8.2 Industrial production index, 1 % y-o-y, ave 5.4 2.0 3.0 3.2 3.4 2.9 3.1 3.2 3.1 Unemployment, % of labour force, eop 1 8.1 6.7 6.3 9.0 8.8 8.5 8.3 8.1 7.9 Nominal GDP, ILSbn 1 Nominal GDP, US$bn 1 Real GDP growth, % 1 change y-o-y GDP per capita, US$ 1 Population, mn 1 Note: f = BMI forecast. Source: 1 Central Bureau of Statistics/BMI © Business Monitor International Ltd Page 37 Israel Information Technology Report Q1 2010 Company Profiles Ness Services Israeli company and global provider of end-to-end IT services and solutions. Ness specialises in outsourcing, systems integration and application development, software and consulting, and quality assurance and training. Recent Developments On September 14 2009, Ness Technologies launched its stock on the Tel Aviv Stock Exchange (TASE), having received approval for the listing from TASE authorities. Ness Technologies common stock will continue to be listed on the NASDAQ exchange in the United States (NSTC) and will remain subject to the rules and regulations of NASDAQ and the US Securities and Exchange Commission. Ness hoped that the dual listing would increase its visibility and status in the Israeli market, with almost one-third of the company's business being for Israeli customers, or delivered by an Israeli workforce. The listing came despite a series of disappointing quarterly results in 2009, due to the effects of the economic crisis. The company witnessed a 19% decline in revenues in Q309, following from a 20% decline in Q209, although more than half of this headline decline was due to currency translation from non-dollar revenues. The steepest declines in H109 were experienced by the company's Systems Integration and Application Development division, while Software Product Engineering continued to perform well. Ness Israel reported record revenues in 2008 despite the global economic headwinds. Ness Israel reported 18.7% topline growth y-o-y to a record US$664.8mn. Ness's defence and homeland security business performed particularly well, demonstrating the relative immunity of these sectors to economic downturn. Last year, the company reported improved operating margins in the Israeli market and closed a number of important deals, despite the strong US dollar and weaker local economy. The Defence and Homeland Security (TSR) division performed particularly well, recording a number of tender wins with both Israeli and foreign clients. Ness claimed that it was not too exposed to the crisis in the banking system, with few of the most afflicted US banks featuring among its clients. However, the company admitted that its NessPro Israel Software Distribution house had been affected by the economic downturn. In Q308, Ness completed the sale of its SAP Sales and Distribution division in Israel to SAP, which wished to establish direct operations. Ness will continue to partner with SAP as a systems integrator. Ness will also retain its SAP Academy training centre and continue to support SAP and its customers in the market. In 2008, Ness Technologies won a US$7mn tender from Israel 's Ministry of Construction and Housing, under the terms of which Ness will develop and operate a new system for managing housing assistance programmes. The ministry's old system will be replaced with one that will be capable of handling 250,000 users. Ness also implemented a core banking system at the First National Bank of Israel. Following on from previous work for the bank, Ness will deploy an SAP-based system for mortgage management. Ness has been on the rise with several landmark deals in the past two years. These included an eight-year US$120mn outsourcing contract, including hardware, with the First International Bank of Israel, in which Ness is serving as lead sub-contractor to EDS. Ness also made the headlines for a 10-year multimillion outsourcing contract with Israel 's Yellow Pages, which, although far smaller at approximately US$8.5mn, was one of the largest projects in Israel at that © Business Monitor International Ltd Page 38 Israel Information Technology Report Q1 2010 time. The project was subsequently extended. Since as long ago as 1988, Ness Technologies has been leading a major project to computerise Israel 's judicial system, heading a team of 120 workers representing 10 subcontractors, including IBM, Taldor and Microsoft. Future Plans Despite challenging second quarter conditions, resulting in further declines in revenues, Ness said the demand environment had begun to stabilise in some of its markets. The company claimed that earnings were on track with its planned recovery and that it was seeing pipeline growth again in some parts of the company. Ness said that it would continue to focus on margin improvements in its Israeli business and reductions in non-core staff. Ness will also continue to provide outsourcing services from its development centres in India - Bangalore, Mumbai and Hyderabad - and from its centres in Israel, Eastern Europe and the Asia Pacific. Revenues In Q309 Ness reported revenues of US$132.7mn, down 19% y-o-y. Net income was US$2.1mn, down a massive 91%, due mainly to weaker than expected revenues in Europe. In Q209 Ness reported revenues of US$137.2mn, down 20% y-o-y. Approximately half the decline was due to currency effects, according to the company. Net income was US$1.0mn, down 87% y-o-y. In Q109, Ness reported revenues of US$136.9mn, down by 15% on Q108. Operating income was US$3.4mn, down by 66% y-o-y. In Q1-Q308, Ness Israel reported unaudited revenues of US$175.3mn, within global revenues for that period of US$494.4mn. In Q308, global revenues of US$160.4mn represented an 18% rise y-o-y. Ness Technologies achieved 2007 revenues of US$557-565mn. Israel accounts for around 40% of Ness's revenues. Presence With 7,800 employees, Ness maintains operations in 16 countries and partners with over 100 software and hardware vendors worldwide. Sectors Ness's Software Product Engineering division was the best performer in Q109 and continued to perform relatively well in the second quarter, with moderate y-o-y revenues growth. The Systems Integration and Application Development division reported disappointing results in the first quarter, but margins improved in Q209 on steady revenues. Ness's Software Distribution division, which resells third-party enterprise software licences, was described as on target in Q109 but underperformed significantly in Q209, with a moderate sequential revenue decline. In Q109 the company reported US$2.5mn of revenues in licence sales commission from SAP Israel. © Business Monitor International Ltd Page 39 Israel Information Technology Report Q1 2010 IBM Services Global services, business consulting, services, digital media, solutions and IT services. Recent Developments IBM has enjoyed successes in the Israeli retail sector where its clients include supermarket chain Clubmarket, with which IBM has an ILS100mn outsourcing contract. In 2008, IBM launched a co-operation agreement with Retalix to develop an integrated management solution for grocery and convenience store retailers. In 2008, IBM announced that it was establishing a new systems and technology group lab in Israel. The new R&D facility focuses on storage and microchip technology solutions, following IBM's acquisition of three local IT storage solutions start-ups in 2008. Among these, IBM acquired privately held Diligent Technologies for a sum rumoured to be around US$200mn. IBM's software lab in Israel was established in 2008, representing what the company called a 'strong vote of confidence' from IBM for the software development capabilities in the country. The facility consists of three strategic software development teams currently operating in Rehovot and Jerusalem and will focus on the areas of search, metadata management and collaborative real-time technologies. In total, IBM Israel now has three research labs, including the long-established Haifa Research Lab and the System Development Lab, and altogether employs 650 researchers and developers to develop solutions for IBM clients in Israel and beyond. Future Plans IBM Global Services plans to launch application hosting and storage services in Israel designed for large enterprises. IBM customers will be able to purchase capacity for their information systems and applications using the services. Revenues IBM revenues in Europe and the Middle East rose by 16% in Q108 to US$8.8bn, the fastest growth of any region. Adjusting for currency, however, growth stood at just 4%. Presence Total IBM staff in Israel has been reported at as many as 2000, employed at Haifa Labs and its various IBM facilities in Rehovot and Jerusalem. Around 60% of IBM staff are estimated to be employed in services. Sectors IBM is standardising its services offerings for smaller companies in the region, launching IBM Express Managed Services, which includes packaged offerings of application and infrastructure managed services sold through IBM business partners. © Business Monitor International Ltd Page 40 Israel Information Technology Report Q1 2010 HP Services Technology services, consulting and integration. Recent Developments As a result of the economic slowdown, HP announced in March 2009 that it was shutting down several wide digital printer production lines at its HP Indigo plant in Kiryat Gat. This followed earlier reports that HP was to invest US$4.1mn to build a new factory to expand its wide-format printer production in Israel. HP said that the new factory in the 2 Caesarea industrial zone would start out with 4,000m of production space, which could later be expanded. A large part of HP's R&D and manufacturing of digital printers is based in Israel. HP continues to look on Israel as a promising location for acquisition targets and has spent around US$6bn to date on high-tech companies in Israel. In 2007, the company spent around US$4.5bn to buy Israeli software support company Mercury. Among other local acquisitions was NUR Macroprinters, an Israel-based manufacturer of industrial wideformat digital inkjet printers. HP paid around US$117.5mn to acquire all of the company's assets. In 2007, HP announced a re-designation of the HP EMEA framework starting May 2007, with greater focus being placed on the Middle East. HP is the leader in the PC segment and is continuing to drive sales through its worldwide marketing campaign 'The Computer is Personal Again' and through an increasing product portfolio. In 2007, HP gained kudos for its landmark contract from the Israeli military for outsourced management of the navy's IT infrastructure. The value of the deal is estimated to be worth several million shekels and highlights the importance of defence spending for the market. HP has recently spent on acquisitions in the Israeli software sector and announced plans for a new International Technology District (ITD), which will offer support to Israeli start-ups. HP hopes that the new ITD will develop strategic relations with around 300 Israeli start-ups. In 2007, HP announced a series of initiatives designed to expand HP partner businesses in the region. The core of the campaign is an enhanced partner strategy focusing on four areas: predictability, partnering, profitability and portfolio. Future Plans Today, HP's focus is on more personalised campaigns, which drive higher cross-sell. Like IBM, it is now leveraging its capabilities into the SME segment. On the enterprise side, HP adopts personalisation not only per customer but also per user within each customer, focused on a number of key target accounts. Revenues In 2007, HP Israel reported local computer sales of around US$850mn. In the same year, HP claimed to become the first IT company to exceed US$10bn quarterly revenues in the region. In Q108, HP's Europe, Middle East and Africa (EMEA) revenues were up 15% to US$12.3bn. Presence Has around 5,000 employees, 730 of whom are employed at HP's software division, which hosts HP's biggest R&D centre worldwide. Sectors HP is the leader in the PC segment and drives sales through its worldwide marketing campaign 'The Computer is © Business Monitor International Ltd Page 41 Israel Information Technology Report Q1 2010 Personal Again' and through an increasing product portfolio. HP is leveraging its capabilities into the SME segment. HP's plans for the market focus on developing new solutions partnerships that offer greater value for the customer. HP offers support services through a subsidiary company, HP-OMS, which offers 24-hour support. However, helplines are hard to come by. © Business Monitor International Ltd Page 42 Israel Information Technology Report Q1 2010 Matrix Services A leading systems integrator in Israel, Matrix is the largest company in the Formula Group and trades on the NASDAQ as FORTY. Shareholders include Bank Leumi and Migdal. Recent Developments Matrix reported some continuing successes in the Israeli IT market in 2009, despite the challenging economic climate, with wins in a number of key sectors including healthcare, financial services, defence and government. Among tender wins in the Israeli market was 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. The company also reported a number of new projects in Q109, including several financial sector implementations. The company credited its continued profitability, in the face of the global economic slowdown, in part to preparatory measures taken at the end of 2008. The company had cut operational expenses, including senior management salaries, and exercised what it described as 'extreme caution' in tenders. In 2008, Matrix reported tender wins in a number of sectors including defence, communication and industrial. Specific successes included winning an ILS20mn project to implement a CRM system at long-time customer Bezeq, as well as a number of public-sector CRM projects. Successes in 2007 included the implementation of a pension consulting system for the Mizrahi Tefahot Bank, contracts based on the Matrix CRM system for three capital market companies and a large-scale integration project for the Airport Authority. Matrix also won a tender from the Ministry of Finance to make government forms available online. The project, which focuses particularly on tax forms, is expected to cost around ILS2mn spread over two years, with the option of further expansion. Matrix is also focusing on the growing outsourcing market with government as well as corporate IT departments and has recently appointed a new sales and marketing manager for its Talpiot division. The division has a dedicated software development centre, with around 25 projects currently claimed to be under way. Future Plans 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. Revenues In Q309 Matrix reported 100% annualised growth in net profits, and 7% growth in operating profits on flat revenue growth. Revenues from core business in the software and solutions sector grew by about 10%. Company revenues were ILS350mn compared with ILS353mn in the same quarter of 2008. In Q209, Matrix reported an approximately 12% growth in profits and 15% in operating profits from core businesses, compared with the same quarter of the previous year. Company revenues were ILS355.7mn compared with ILS353.9mn in the the same quarter of 2008. Matrix also reported a decent quarter in Q109 despite the deceleration in economic growth. Turnover was up to ILS375mn in that quarter, from ILS326mn in the same period for the previous year, representing growth of around 15%. Operating profits were also up, by around 6.7%. © Business Monitor International Ltd Page 43 Israel Information Technology Report Q1 2010 Presence Employs around 3,500 IT professionals. Sectors Software services remain the company's core area, accounting for around 68% of total revenues in Q209, up from 64% in Q109. In 2009, Matrix won a number of projects in the financial services sector, including a CRM-based system for management of collection processes from a major bank, and significant product deals for several financial institutions. The company also reported wins in the communications sector, including storage and testing projects, and in the defence sector. Matrix has won projects from many government organisations including the Ministry of Defence, the Israeli knesset (Senate) and others. Other key sectors include energy, transport and public health. © Business Monitor International Ltd Page 44 Israel Information Technology Report Q1 2010 Microsoft Services Software, consulting and support services. Recent Developments In Summer 2009 Microsoft continued to lay the groundwork for the new operating system launch and released the enterprise version of the software in August. Microsoft anticipated that support from leading PC makers would underpin success for the new system, despite some caution from businesses. In 2007, Microsoft sold 450,000 Windows XP and Vista operating systems in Israel, of which 40% were Vista. Meanwhile, Microsoft also continues to make progress in the enterprise software segment. In 2008, Microsoft won a substantial CRM tender from Leumi Card, estimated at around ILS15mn. Microsoft co-operated with Matrix to specify and implement a Microsoft Dynamics CRM 4.0 solution. The company also reported some big wins in the local market in 2007, in both the public and private sectors. Leading Israeli HMO Maccabi Healthcare Services deployed a CRM system based on Microsoft's Dynamics CRM platform. The system was designed to integrate all existing IT administrative systems for the healthcare group, which has more than 5,300 clinics in Israel and covers around onequarter of Israel's population. The system was developed with the help of integrator Eyron.net. In 2007, Microsoft Israel was also selected by Super-Pharm Israel, the leading drug store chain, to roll out a portal project based on Microsoft Office Share Point Portal Server 2003. The portal was due to have been rolled out to more than 120 stores by end2007. Microsoft now sees services as an important contributor to raising customer satisfaction and generating product demand and is changing the way it runs its services operations in two significant ways. First, it plans to align services more closely with its enterprise sales force. Second, Microsoft is creating a stronger role for its services operation in providing product support to enterprise customers. Future Plans In 2010, Microsoft hopes that sales of its Windows 7 operating system, launched in October 2009, will boost its local sales. Microsoft Corporation is continuing its efforts to sell software upgrades to the Israeli government, despite Israel's decision to stop buying Microsoft applications and amid calls for an antitrust commission investigation into Microsoft's 'monopoly' status. Revenues Microsoft Israel has an estimated annual turnover of around US$1bn. Microsoft expects double-digit growth in its Middle East revenues over the next three to five years. Revenues have increased 25% annually for the past five years. Presence A workforce of 200 in Ra'anana and Haifa. Sectors In the early 1990s, Microsoft made Hebrew one of the central languages at Microsoft's development centre at Redmond. Since then, all Microsoft programs have been translated into Hebrew at a cost of US$100mn. © Business Monitor International Ltd Page 45 Israel Information Technology Report Q1 2010 Country Snapshot: Israel Demographic Data Section 1: Population Population By Age, 2005:2030 (mn, total) Population By Age, 2005 (mn) 70-74 70-74 60-64 60-64 50-54 50-54 40-44 40-44 30-34 30-34 20-24 20-24 10-14 10-14 0-4 -0.4 0-4 -0.2 0.0 Male 0.2 0.4 -1.0 -0.5 Female 0.0 2030 0.5 1.0 2005 Source: UN Population Division Table: Demographic Indicators, 2005-2030 2005 2010f 2020f 2030f Dependent population, % of total 36.7 35.6 37.3 36.7 Dependent population, total, ‘000 2,538 2,648 3,092 3,365 Active population, % of total 63.3 64.3 62.6 63.2 Active population, total, ‘000 4,373 4,783 5,178 5,799 Youth population*, % of total 27.1 26.0 24.5 21.9 Youth population*, total, ‘000 1,873 1,939 2,031 2,008 Pensionable population, % of total 9.6 9.5 12.8 14.8 Pensionable population, total, ‘000 665 709 1,061 1,357 f = forecast. * Youth = under 15. Source: UN Population Division © Business Monitor International Ltd Page 46 Israel Information Technology Report Q1 2010 Table: Rural/Urban Breakdown, 2005-2030 2005 2010f 2020f 2030f Urban population, % of total 91.7 92.0 92.2 93.0 Rural population, % of total 8.3 8.0 7.8 7.0 6,168 6,731 7,626 8,524 557 584 643 637 6,725 7,315 8,269 9,161 Urban population, total, ‘000 Rural population, total, ‘000 Total population, '000 f = forecast. Source: UN Population Division Section 2: Education And Healthcare Table: Education, 2002-2005 2002/03 2004/05 110 110 Gross enrolment, secondary 93 93 Gross enrolment, tertiary 57 58 Adult literacy, male, % na 98.5 Adult literacy, female, % na 95.9 Gross enrolment, primary Gross enrolment is the number of pupils enrolled in a given level of education regardless of age expressed as a percentage of the population in the theoretical age group for that level of education. na = not available. Source: UNESCO Table: Vital Statistics, 2005-2030 2005 2010 2020 2030 Life expectancy at birth, males (years) 77.5 78.4 80.1 81.2 Life expectancy at birth, females (years) 81.6 82.6 84 85.2 Life expectancy estimated at 2005; f = forecast. Source: UNESCO © Business Monitor International Ltd Page 47 Israel Information Technology Report Q1 2010 Section 3: Labour Market And Spending Power Table: Employment Indicators, 2001-2006 2001 2002 2003 2004 2005 2006 2,503 2,547 2,610 2,679 2,740 2,810 2.8 1.7 2.4 2.6 2.3 2.5 38.4 38.4 38.6 39 39.1 39.4 Employment, '000 2,265 2,284 2,330 2,401 2,494 2,574 – % change y-o-y 1.9 0.8 2.0 3.0 3.8 3.2 – male 1,236 1,238 1,258 1,300 1,340 1,384 – female 1,029 1,046 1,073 1,101 1,154 1,190 — female, % of total 45.4 45.8 46.0 45.8 46.2 46.2 Total employment, % of labour force 90.4 89.7 89.2 89.6 91.0 91.6 Unemployment, '000 234 262 280 278 246 236 – male 121 138 143 137 125 119 – female 113 124 137 141 122 118 – unemployment rate, % 9.4 10.3 10.7 10.4 9.0 8.4 2000 2007 2008f 2009f 2010f 2012f Consumer expenditure per capita 9,998 12,148 13,693 14,610 14,950 16,598 Poorest 20%, expenditure per capita 2,849 3,462 3,902 4,164 4,261 4,731 Richest 20%, expenditure per capita 22,445 27,273 30,740 32,800 33,563 37,263 Richest 10%, expenditure per capita 28,793 34,988 39,435 42,078 43,056 47,803 Middle 60%, expenditure per capita 8,231 10,002 11,274 12,029 12,309 13,666 12,993 17,451 18,074 na na na Poorest 20%, expenditure per capita 3,703 4,973 5,151 na na na Richest 20%, expenditure per capita 29,168 39,177 40,576 na na na Richest 10%, expenditure per capita 37,418 50,258 52,053 na na na Middle 60%, expenditure per capita 10,697 14,368 14,881 na na na Economically active population, '000 – % change y-o-y – % of total population Source: ILO Table: Consumer Expenditure, 2000-2012 (US$) Purchasing power parity Consumer expenditure per capita f = BMI forecast. na = not available. Source: World Bank, Country data; BMI calculation © Business Monitor International Ltd Page 48 Israel Information Technology Report Q1 2010 Table: Average Annual Wages, 2000-2012 Local currency 2000 2006 2007 2008f 2009f 2010f 2012f Total 81,492 89,592 92,210 94,331 95,606 97,137 100,273 Non-agricultural 82,584 90,612 91,176 93,273 94,534 96,048 99,149 103,980 113,913 114,622 117,258 118,843 120,746 124,645 7.4 3.4 2.9 2.3 1.3 1.6 1.6 Total 19,983 20,358 22,771 25,155 26,557 26,982 28,649 Non-agricultural 20,251 20,589 22,516 24,873 26,259 26,680 28,328 Manufacturing 25,498 25,884 28,306 31,269 33,012 33,541 35,613 Total, purchasing power parity 25,969 30,546 32,710 33,203 na na na Manufacturing Wage growth, % y-o-y US$ f = BMI forecast. na = not available. Source: ILO, BMI © Business Monitor International Ltd Page 49 Israel Information Technology Report Q1 2010 BMI Methodology IT Ratings – Methodology BMI has introduced new IT Business Environment Ratings. Our approach has been threefold. First, we have defined the risks rated in order to capture the operational dangers to companies operating in this industry. Second, we have attempted where possible to identify objective indicators that may serve as proxies for issues/trends. Finally, we have used BMI’s proprietary Country Risk Ratings (CRR) to ensure that only the aspects most relevant to the industry have been included. Overall, the new ratings system, which is integrated with those of all 16 industries covered by BMI, offers an industry-leading insight into the prospects/risks for companies across the globe. Ratings Overview Ratings System Conceptually, the new ratings system divides into two distinct areas: Limits of potential returns: Evaluation of sector’s size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. Risks to realisation of those returns: 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. Indicators The following indicators have been used. Overall, the rating uses three subjectively-measured indicators, and numerous separate indicators/datasets. © Business Monitor International Ltd Page 50 Israel Information Technology Report Q1 2010 Table: IT Business Environment Indicators Indicator Rationale Limits to potential returns Market structure IT market value, US$bn Sector value growth, % y-o-y Denotes breadth of IT market. Large markets score higher than smaller ones Denotes sector dynamism. Scores based on annual average growth over five-year forecast period Government initiatives and spending Denotes spending boost provided by public sector, which can be a crucial determinant of sector development Hardware, % of total sales Denotes maturity of market. A high proportion of hardware sales –compared to services/software – indicates that the overall IT market is immature Country structure Urban-rural split GDP per capita, US$ Urbanisation is used as a proxy for development. Predominantly rural states therefore score lower A high GDP per capita supports long-term industry prospects. Overall score for country structure is also affected by the coverage of the power transmission network across the state Risks to potential returns Market risks Intellectual property (IP) laws ICT policy Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting Subjective evaluation of official policy towards IT development, as enshrined in statute and tax code Country risk Short-term external risk Rating from CRR evaluates the vulnerability to external shock, which is the principal cause of economic crises. Such a crisis would cut investment Short-term financial risk Rating from BMI’s CRR, 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 Legal framework Bureaucracy Corruption Rating from CRR to denote ease of trading with the state Rating from CRR denotes the strength of legal institutions in each state – security of investment can be a key risk in some emerging markets Rating from CRR denotes ease of conducting business in the state Rating from CRR 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 51 Israel Information Technology Report Q1 2010 Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all subcomponents equal weight. Consequently, the following weight has been adopted. Table: Weighting Of Components Component Weighting Limits of potential returns 70% – IT market – 65% – Country structure – 35% Risks to realisation of potential returns 30% – Industry risks – 40% – Country risk – 60% Source: BMI How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series 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. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, however, is the use of vector autoregressions. Vector autogressions allow us to forecast a variable using more than the variable’s 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. © Business Monitor International Ltd Page 52 Israel Information Technology Report Q1 2010 It must be remembered that human intervention plays a necessary and desirable part in all of our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. IT Industry Forecasts There are a number of criteria that 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 naturally affected by consideration of a variety of internal and external political and economic factors. Within best-practice techniques of time-series modelling, BMI’s 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: ƒ Overall economic context, and GDP and demographic trends; ƒ Underlying ‘information society’ trends; ƒ Projected GDP share of industry; ƒ Maturity of market structure; ƒ Regulatory developments and government policies; ƒ Developments in key client sectors such as telecommunications, banking and e-government; ƒ Technological developments, and diffusion rates; ƒ Exogenous events. Estimates are calculated using BMI’s 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 Union (ITU), officially released company results and figures, and international and national industry news agencies. © Business Monitor International Ltd Page 53 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... estimated US$1.0bn to US$1.4bn and services from an estimated US$1.6bn to US$2.2bn © Business Monitor International Ltd Page 28 Israel Information Technology Report Q1 2010 Israeli IT Industry - Historical Data & Forecasts (US$mn, unless otherwise stated) IT Sector, Q1 2010 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f IT market (US$mn) 4,428 4,826 4,633 4,865 5,108 5,363 5,739 6,198 IT market as % GDP 2.7%... end-users © Business Monitor International Ltd Page 21 Israel Information Technology Report Q1 2010 Software Israeli software spending is projected at US$1.0bn in 2010, up from US$973mn in 2009 The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period In recent years, the SME segment, the mainstay of the Israeli business sector, has emerged as an important growth... the biometric database bill The ID cards, set to cost Israel US$67.49mn, would use 'smart' identification methods involving fingerprints and digital photography © Business Monitor International Ltd Page 26 Israel Information Technology Report Q1 2010 Industry Forecast Scenario BMI projects that the Israeli IT market will have a value of US$4.9bn in 2010, with a return to singledigit growth following... importer, Israel is vulnerable to large price fluctuations; the surge in oil prices in 2008 contributed to rising inflation ƒ Competition from emerging Chinese and Indian producers of high-tech goods and polished diamonds, as well as sluggish growth in the eurozone, could undermine demand for Israeli exports © Business Monitor International Ltd Page 10 Israel Information Technology Report Q1 2010 Israel. .. its SAP Academy training © Business Monitor International Ltd Page 33 Israel Information Technology Report Q1 2010 centre In Q10 9 Ness completed an ILS80mn municipal taxes and water billing and collection project for the Tel Aviv Jaffa municipality, based on SAP solutions Microsoft Israel has an annual turnover of around US$1bn In 2010, Microsoft hopes that sales of its Windows 7 operating system, launched... the end-user Israel experienced dramatic growth in the number of internet users in recent years, with penetration rising from around 17% in 2000 to 56.4% in 2005 BMI estimates that the penetration rate had risen to 61.9% at end-2008 © Business Monitor International Ltd Page 34 Israel Information Technology Report Q1 2010 Macroeconomic Forecast 2010 Growth Forecast Up, Rate Hike Likely Israeli quarterly... electronics goods, with real private consumption growth projected to be negative at -2% in 2009 and just 1% in 2010 In Q10 9, spending on household equipment dropped by 6.7% In H209 rising job insecurity for those in work is © Business Monitor International Ltd Page 27 Israel Information Technology Report Q1 2010 expected to have a negative impact on consumer sentiment, while many companies facing tight credit... the report © Business Monitor International Ltd Page 14 Israel Information Technology Report Q1 2010 Middle East Regional IT Markets Overview IT Penetration Internet Penetration BMI projects continued improvement in (per 100 population) regional ICT indicators over the next few years, driven by investment in broadband and government ICT initiatives The Middle East divides into two groups in terms of information. .. in Israel, the tender did not include Intel processors, but instead those of AMD The national smart ID card project has © Business Monitor International Ltd Page 32 Israel Information Technology Report Q1 2010 also been an important area for major IT vendors such as IBM, HP and Sun, with 11 different vendors involved at various stages since 2001 A number of multinationals are well embedded in the Israeli... underlined that IT represents a crucial part of Israel' s economy The Israeli Association of Electronics and Software Industries (IAESI) projected that the software sector will generate US$3.2bn annually by the end of the decade According to recent figures, electronics and software © Business Monitor International Ltd Page 25 Israel Information Technology Report Q1 2010 exports had already reached US$1.87bn