Israel information technology report q2 2015

... growth of 3.1% in 2015, from our previous forecast of 3.3% © Business Monitor International Page 21 Israel Information Technology Report Q2 2015 Low Base Effects Key To Rebound In 2015 Israel - GDP... Monitor International Page 24 Israel Information Technology Report Q2 2015 Investment in the Israeli technology segment will contribute to capital formation growth in 2015 On November 11, 2014,... Industries technology campus in the Negev and expand its computer services segment in Israel © Business Monitor International Page 45 Israel Information Technology Report Q2 2015 Israeli Start-Ups

Q2 2015 www.businessmonitor.com ISRAEL INFORMATION TECHNOLOGY REPORT INCLUDES 5-YEAR FORECASTS TO 2019 ISSN 1752-4245 Published by:Business Monitor International Israel Information Technology Report Q2 2015 INCLUDES 5-YEAR FORECASTS TO 2019 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: January 2015 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2015 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 Q2 2015 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................... 9 IT SWOT .................................................................................................................................................. 9 Wireline ................................................................................................................................................. 11 Political ................................................................................................................................................. 12 Economic ............................................................................................................................................... 13 Industry Forecast .............................................................................................................. 14 IT Market ............................................................................................................................................... 14 Table: IT Industry - Historical Data And Forecasts (Israel 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Wireline ................................................................................................................................................. 19 Table: Telecoms Sector - Wireline - Historical Data & Forecasts (Israel 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Macroeconomic Forecasts ............................................................................................... 21 Economic Activity .................................................................................................................................... 21 Table: MENA - Operational Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Table: Economic Activity (Israel 2009-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Industry Risk Reward Index ............................................................................................. 28 Industry Risk Reward Ratings .................................................................................................................... 28 Table: MENA Q215 RISK/REWARD INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Market Overview ............................................................................................................... 32 Hardware ............................................................................................................................................. 32 Software ............................................................................................................................................... 37 Services ................................................................................................................................................ 41 Industry Trends And Developments ................................................................................ 44 Regulatory Development .................................................................................................. 49 Table: IT Regulatory Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Table: Government Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Competitive Landscape .................................................................................................... 53 International Companies ......................................................................................................................... 53 Table: Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Local Companies ................................................................................................................................... 54 Table: Amdocs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Table: Check Point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Table: Imperva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Table: Retalix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Company Profile ................................................................................................................ 58 © Business Monitor International Page 4 Israel Information Technology Report Q2 2015 Matrix ................................................................................................................................................... 58 Ness ...................................................................................................................................................... 62 Hilan ..................................................................................................................................................... 67 Table: Hilan Financial KPIs, 2008-2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Regional Overview ............................................................................................................ 71 Table: Sap Africa's Growth Pillars, August 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Demographic Forecast ..................................................................................................... 75 Table: Population Headline Indicators (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Table: Key Population Ratios (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Table: Urban/Rural Population & Life Expectancy (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Table: Population By Age Group (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Table: Population By Age Group % (Israel 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Methodology ...................................................................................................................... 80 Industry Forecast Methodology ................................................................................................................ 80 Sources ................................................................................................................................................ 81 Risk/Reward Index Methodology ............................................................................................................... 82 Table: It Risk/Reward Index Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Table: Weighting Of Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 © Business Monitor International Page 5 Israel Information Technology Report Q2 2015 BMI Industry View BMI View: Israel's vibrant ICT start-up community and highly skilled tech workers have attracted record breaking investment to the high-tech sector in 2014. While the available pool of skilled workers will eventually dwindle, investment will remain high in 2015 as Chinese ICT firms begin competing for talent with their Western counterparts. However, because of the comparatively high penetration of IT products and services, as well as its small population, Israel's IT market is expected to grow more slowly than most others in the region. Given Israel's geopolitical location and the uptick in violence in the region in 2014, we expect spending on cyber security to be a key driver of growth in Israel's IT market, chiming with our view that software and services will increase as a proportion of IT spend to account for more than 66% of the market by 2019. Headline Expenditure Projections Computer Hardware Sales: Forecast to reach ILS9.4bn in 2015, up from ILS9.225bn in 2014. We expect growth to accelerate in 2015, driven by the full launch of 4G mobile networks and ongoing migration to the Windows 8 OS. Software Sales: ILS6.414bn in 2015, up 9.3% year-on-year (y-o-y) from ILS5.867bn in 2014. Enterprise software spending will be the main growth driver as device and data proliferation will result in increased spending on customer relationship management (CRM), databases and business intelligence. IT Services Sales: We expect IT services sales will continue to outperform the rest of the IT market, reaching ILS8.793bn in 2015, up from ILS8.263bn in 2014. Cyber security services will outperform in terms of growth, but it will be stable sectors such as government and defence that continue to account for the majority of spending. Key Trends And Developments In January 2015, Amazon and Dropbox joined the fray of IT investment in Israel, intending to use their acquisitions of chipmaker Annapurna Labs and mobile productivity tools developer CloudOn, respectively, as a starting point to expand their R&D operations in Israel. Dropbox announced that it will in fact discontinue CloudOn's products in March, and its 30 employees will then begin focusing on Dropbox products, which illustrates that Israel's skilled tech workers are at least as important to global IT firms as the wide range of innovative products they have developed. © Business Monitor International Page 7 Israel Information Technology Report Q2 2015 Israel's Central Bureau of Statistics estimates there were around 145,000 jobs in the ICT services industry at the end of 2013. Although continued entry of global IT firms will add to the number of ICT services jobs, in a country with a total working age population of 4.8mn in 2014 the pool of skilled workers is limited. It is therefore unlikely that the level of investment will remain as high over the longer term, once the most attractive start-ups and experienced tech workers are bought up and hired by global firms. Nevertheless, we expect investment in Israel's IT sector to remain strong throughout 2015 as competition among global IT players to attract skilled workers intensifies. Notably, in late 2014 Chinese firms also began courting Israel's high tech start-ups. China's Ping An Insurance Co. participated in a USD85mn round of funding for content marketing and monetisation firm IronSource in September 2014, while Baidu invested USD3mn in remote controlled video camera company Pixellot in November, and Alibaba invested in animated QR code start-up Visualead in January 2015. We expect Chinese players to follow the lead of their Western counterparts and establish R&D hubs in Israel over the coming quarters. © Business Monitor International Page 8 Israel Information Technology Report Q2 2015 SWOT IT SWOT SWOT Strengths ■ Home to the most well developed economy and IT market in the region with major local IT companies based in the country, a highly educated, linguistically skilled workforce, and relatively low labour costs compared with developed markets. ■ Strong defence and government spending provides base for IT demand. ■ Strong political support, with the government having implemented many policies to aid in the expansion of the IT sector. ■ Investment in FTTH and wireless data networks provide basis for cloud computing growth and internet of things expansion. Weaknesses ■ The recession at the beginning of the 2000s focussed customers on the bottom line, with enhanced services and customer market power adding to pressure on pricing and margins. ■ Digital divide, with just 30% of the bottom-income group having home internet access. Opportunities ■ Cyber security threats should attract increased spending on safeguards as the concerns of government and enterprises escalate. ■ Growing demand for tablets and other mobile computing devices such as hybrids and ultrabooks. ■ Defence and government projects should be less sensitive to fiscal retrenchment, with a major data centre project under way for the Israel Defense Forces. ■ Outsourcing, software-as-a-service and applications management likely to grow fastest out of IT services, with particular opportunities in the financial sector. ■ Opportunities for partnership/investment in Israel's lively local IT company sector. © Business Monitor International Page 9 Israel Information Technology Report Q2 2015 SWOT - Continued Threats ■ Government austerity measures will dampen consumer and business spending. ■ Other factors may affect business confidence, notably the security situation. ■ The weaker local currency, and aggressive pricing, may continue to constrain growth and put pressure on margins. © Business Monitor International Page 10 Israel Information Technology Report Q2 2015 Wireline SWOT Analysis Strengths ■ Well developed internet/broadband sector compared with regional peers. ■ Fixed-line liberalisation has led to increased competition and the erosion of incumbent market share. ■ Incumbent operator Bezeq faces strong completion from HOT Telecom, which has recently entered the mobile market. Weaknesses Opportunities ■ Internet infrastructure is currently controlled by Bezeq and HOT Telecom. ■ Regulator has been slow to license new services, eg WiMAX wireless broadband. ■ VoIP licensing and triple-play for Bezeq placed on hold could hinder prospects. ■ Introduction of LLU will give alternative operators access to Bezeq's network and should stimulate much greater competition. ■ Regulator is proposing a 76% reduction in fixed line interconnection fees; this could stimulate increased service usage. ■ The ViaEurpoa-led consortium building a fibre network over the Israel Electric Corporation (IEC) infrastructure would provide competition for Bezeq and HOT, and ultimately boost growth in the market. Threats ■ The launch of 4G LTE could accelerate the rate of fixed to mobile substitution. ■ Continued reduction of internet tariffs could have devastating effect on revenues. ■ Fixed broadband growth is slowing as mobile broadband services become increasingly popular. ■ Operators, Bezeq in particular, have resisted the introduction of number portability, which could lead to a price war and thus drive down mobile revenues. © Business Monitor International Page 11 Israel Information Technology Report Q2 2015 Political SWOT Analysis Strengths ■ Despite corruption allegations against some officials and members of parliament, government members are still some of the most accountable in the region. ■ Elections are for the most part free and transparent, ensuring that a broad spectrum of political views is represented within government. Weaknesses ■ The protracted conflict with the Palestinians means there are persistent security risks. Strategies to minimise or end the conflict are domestically divisive, with tensions between Israel and Hamas set to remain elevated. ■ Frequent change to the composition of the coalition government often leads to policies becoming fragmented or significantly diluted. Opportunities ■ With the civil war in Syria continuing, risks of a spill over into Israel are ever-present. ■ A warming of relations with Greece has given Israel the ability to engage in military exercises over a larger geographic area. Threats ■ Finding a lasting solution with the Palestinians continues to pose a dilemma for Israel, and we think a final agreement will remain elusive. Risks of a radicalisation in the West Bank are thus prominent. ■ Continued home-building in some West Bank settlements antagonises the Palestinians and stands in the way of the peace process. © Business Monitor International Page 12 Israel Information Technology Report Q2 2015 Economic SWOT Analysis Strengths ■ The workforce is highly educated and skilled, which will continue to attract investment in the IT and pharmaceutical sectors. ■ The country's close ties with the US provide it with substantial financial assistance for economic and military ends. Weaknesses ■ A sharp deterioration in the security situation can have an immediate impact on domestic confidence, tourism receipts, the exchange rate and foreign investment. ■ The economy is highly exposed to that of the US and Europe in terms of exports and investment. Opportunities ■ In the next five years, relatively elevated levels of employment will underpin robust private consumption growth. ■ Israel produces more technology start-up companies than any other country in the world except the US. ■ The discovery of large offshore gas deposit will bring an influx in foreign investment and is expected to serve the country's energy needs for decades. Threats ■ Competition from emerging Chinese and Indian producers of high-tech goods and polished diamonds could undermine demand for Israeli exports. © Business Monitor International Page 13 Israel Information Technology Report Q2 2015 Industry Forecast IT Market Table: IT Industry - Historical Data And Forecasts (Israel 2012-2019) 2012 IT market value, ILSmn 2018f 2019f 22,299.5 22,576.0 23,354.8 24,607.9 26,490.5 27,698.4 28,895.0 30,073.9 IT market value, % of GDP 2013 2014e 2015f 2.2 2.2 2.2 2.2 Computer hardware sales, ILSmn 9,388.1 9,143.3 9,225.2 Personal computer sales, ILSmn 7,895.4 7,753.5 Software sales, ILSmn 5,177.2 Services sales, ILSmn 7,734.2 2016f 2.2 2017f 2.2 2.2 2.1 9,400.2 9,801.5 10,082.2 10,113.2 10,104.8 7,869.1 8,065.4 8,517.5 8,821.9 8,909.8 8,963.0 5,524.3 5,866.6 6,414.2 7,128.1 7,520.4 8,146.5 8,792.5 7,908.4 8,263.1 8,793.5 9,560.9 10,095.8 10,635.2 11,176.6 e/f = BMI estimate/forecast. Source: BMI We continue to hold the view that the Israeli IT market will experience slow and steady growth over the medium term and gradually decline as a percentage of GDP. This is a product of saturation of the hardware and software/services market and price competition between vendors, which will hold down the overall value of the market. Nevertheless, Israel remains at the forefront of development of security services and continues to attract investment in research and development centres from global IT firms. We estimate the IT market to reach a value of ILS23.355bn in 2014, equal to USD6.528bn and up from ILS22.6bn in 2013. Despite our expectations of relatively weak growth in 2013 and 2014, we maintain a more positive outlook for Israel's IT market over the long term. Israel remains a robust IT market with plenty of opportunities across industrial, government, defence and financial services spending. Our five-year compound annual growth rate sees growth around 4.8% in Israeli new shekel terms for the period from 2014-2018. We expect IT services will be the fastest growing segment of the IT market, narrowly ahead of software, with both growing fast relative to hardware. In terms of key verticals, the financial services and defence sectors drive growth, with rising geopolitical tensions likely to result in even stronger demand for IT security solutions. The nature of sales will change, however, as business management becomes increasingly important and the hardware segment contributes comparatively less to the market's overall growth. Given Israel's rich tech skills resource base, many organisations prefer to conduct software development in-house. © Business Monitor International Page 14 Israel Information Technology Report Q2 2015 2015 Outlook We project real GDP growth of 3.1% in Israel in 2015, an improvement on a slight economic downturn in 2013. BMI's Country Risk team downgraded Israel's growth forecast slightly in the wake of the violence between Israel and Gaza, but does not expect the events to have a lasting negative impact on the economy. Over the remaining years to 2019, we expect slow but steady acceleration in the economy, with average annual GDP growth of 3.5%. BMI also forecasts underwhelming expansion of private consumption growth at 3.5% in 2015. While government austerity and political instability weighed on Israel's economic outlook in 2013 and early 2014, we believe opportunities for vendors in the IT market will expand more quickly in 2015, most notably in demand for cyber and information security products and services. This is a growth area in IT markets globally, but there is a particularly large opportunity in Israel where regional political tensions and the uptick in cyber attacks since 2012 affecting Israel, UAE and Saudi Arabia, have concentrated the minds of government and enterprise decision-makers on investments to protect their IT systems. Other areas where we expect to see growth include business intelligence and cloud computing, with the latter likely to gain traction among small- and medium-sized enterprises (SMEs) as a lower cost alternative to bespoke systems. Meanwhile sales of hardware and software will continue to benefit from Windows-8 driven upgrades. The move to mobility and new form factors such as tablets, hybrids and ultrabooks will help to drive demand in the consumer segment, while to some extent undermining demand for traditional notebooks. Meanwhile, despite the challenging trading conditions, vendors have reported a continued flow of IT projects, with large tenders from the Israeli ministries of finance and defence and the Bank of Israel. In December 2013 VMware won a data centre contract from the Israel Defence Forces valued at USD27mn in the local media. © Business Monitor International Page 15 Israel Information Technology Report Q2 2015 Industry Trends - IT Market 2012-2019 40,000 3 30,000 2.5 20,000 2 10,000 1.5 0 1 2012 2013 2014e IT market value, ILSmn (LHS) 2015f 2016f 2017f 2018f 2019f IT market value, % of GDP (RHS) e/f = BMI estimate/forecast. Source: BMI Market Drivers The Israeli IT market has several supportive fundamentals that should keep it in positive territory during BMI's five-year forecast period to 2019. Although household computer penetration of more than 75% offers only limited potential for growth derived from first time buyers, there are several factors pushing multiple device ownership. Innovation in form factors, including tablets and hybrids will push sales of personal devices. Meanwhile, investments by telecoms operators to expand the reach of high capacity wireless and wireline broadband services will catalyse demand for personal devices. With the full launch of 4G LTE networks in 2015, spending will continue to move away from desktops as more consumers acquire more mobile personal devices such as tablets - which may also cut into spending on notebooks. Per capita IT spending is expected to rise from ILS2,986 in 2014 to ILS3,585 by 2018. However, spending will fail to keep pace with GDP growth in Israel as the economy becomes less heavily weighted towards the high-tech sector following gas exploration and growth in other sectors. Some key IT spending verticals will keep pace; for instance defence and financial services, which are somewhat insulated from economic © Business Monitor International Page 16 Israel Information Technology Report Q2 2015 vicissitudes. Vendors will target projects across a range of sectors; from government to financial services, telecoms and utilities. While the defence sector is expected to remain the single most important vertical, investments by financial sector organisations should mean more large outsourcing deals. Other sectors of opportunity will include healthcare and telecoms, as well as infrastructure, transport and the small office and home office sector. Income Per Capita Breakdown (2012-2019) 100,000 75,000 50,000 25,000 0 2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f Poorest 20%, net income per capita, ILS Richest 20%, net income per capita, ILS Middle 60% of population, net income per capita, ILS e/f = BMI estimate/forecast. Source: BMI, national sources Opportunities BMI expects IT services will display the highest growth over the forecast period to 2019, due to growth in key verticals and the opportunities presented by cloud computing, big data analytics and real-time enterprise services based on the internet of things. As noted, cloud computing is expected to be a source of revenue growth over the medium term as organisations looking for efficiencies turn to Software-as-a-Service and Infrastructure-as-a-Service. © Business Monitor International Page 17 Israel Information Technology Report Q2 2015 Particular areas of opportunity for cloud computing include banking and retail, as organisations in those fields look to save money on hardware and improve customer services. While large organisations still dominate, SMEs have been investing more and represent a growth opportunity. Many SMEs are waking up to the need to compete through more direct investment in support and service infrastructures. Cloud computing is a field which could gain traction with SMEs as the ondemand model fits well with their smaller budgets and lack of demand for bespoke in-house solutions and software. Summary BMI believes IT spending has sufficient strength in key demand verticals to maintain a positive trajectory over the medium term. However, we do not expect growth to keep pace with GDP as market saturation and price competition between vendors limit increases in the total value of the market. The hardware market is forecast to grow from ILS9.2bn in 2014 to ILS10.1bn in 2019, with PC sales projected to rise from an estimated ILS7.9bn to ILS9.0bn. While growth will remain strong, the market will be increasingly dominated by IT service sales and software sales, indicating the maturity of the market. BMI forecasts software sales to account for 29.2% of Israel's IT market by 2019, up from 25.1% in 2013, while services are forecast to rise from 35.4% of the IT market to 37.2% over the same timeframe. © Business Monitor International Page 18 Israel Information Technology Report Q2 2015 Wireline Table: Telecoms Sector - Wireline - Historical Data & Forecasts (Israel 2011-2018) 2011 Main telephone lines in service, '000 2013e 2014f 2015f 2016f 2017f 2018f 3,500.0 3,594.0 3,350.0 3,383.8 3,365.2 3,333.3 3,329.3 3,352.9 Main Telephone Lines/100 Inhabitants Internet users, '000 2012 46.4 47.0 43.3 43.3 42.5 41.5 40.9 40.6 6,013.0 6,698.0 7,069.0 7,348.0 7,492.0 7,702.0 7,896.0 8,021.0 Internet users/100 inhabitants 79.7 Broadband internet subscribers, '000 87.6 91.4 93.9 94.6 95.9 97.0 97.0 1,800.0 1,950.0 2,025.0 2,128.3 2,202.8 2,266.6 2,318.8 2,358.2 Broadband internet subscribers/100 Inhabitants 23.9 25.5 26.2 27.2 27.8 28.2 28.5 28.5 f = BMI forecast. Source: BMI Industry Trends - Wireline Sector (2011-2018) 4,000 3,000 2,000 1,000 0 2011 2012 2013 2014f 2015f 2016f 2017f 2018f Broadband internet subscribers, '000 Main telephone lines in service, '000 f = BMI forecast. Source: BMI BMI estimates there were around 3.35mn active fixed-line connections in Israel at the end of 2014. This was a decline of 6.8% y-o-y on the back of acceleration in fixed-to-mobile substitution, driven by falling © Business Monitor International Page 19 Israel Information Technology Report Q2 2015 mobile tariffs and the rapid expansion of mobile data networks. That said, the country's fixed broadband operators have reported strong uptake in multiplay packages in recent quarters, a trend we expect the cushion the decline in fixed-line connections during our forecast period, ending in 2018. Our new forecast expects continued fixed-line growth in 2014 and a generally flat performance in the remainder of our forecast period. However, we note that the country's high penetration rate has the potential to increase the downward pressure on fixed-line connections. We predict there will be 3.384mn lines by the end of 2014, equivalent to a penetration rate of 43.3%. By the end of 2018, we anticipate a market of around 3.405mn lines and a penetration rate of 40.6%. Incumbent fixed-line operator Bezeq's market share continues to fall as a result of competition from alternative cable operators such as HOT Telecom, and from Partner. The latter, which significantly strengthened its position after buying a stake in 012 Smile, reported solid fixed-line customer growth in 2012. Owing to the lack of reliable data on the number of mobile broadband subscribers (specifically those subscribers who use USB dongles and data cards to access the internet via laptops, PCs and smartphones), our forecast for the Israeli broadband sector is currently based on fixed broadband connections only. Data published by incumbent telco Bezeq and alternative operators HOT and Partner Communications suggests that the number of fixed broadband subscribers had increased to around 2.025mn at the end of 2013, up by 3.9% y-o-y. BMI believes that, by the end of 2014, Israel's broadband subscriber base will have risen to 2.128mn; this is equivalent to a penetration rate of 27.2% and reflects full year growth of 5.1%. Over the next five years ending 2018 we envisage average annual growth of around 2% for the Israeli fixed broadband sector. This will see the subscriber base reach 2.384mn subscribers, equivalent to a penetration rate of 28.4%. We expect the growing popularity of mobile broadband services to result in slowing demand growth in the fixed broadband sector. Nevertheless, we identify several developments which will sustain fixed broadband growth for the duration of our forecast and beyond. These include new regulations forcing Bezeq to open wholesale access to its DSL infrastructure, the launch of wholesale broadband services by the ViaEuropa-led consortium building a fibre network over the Israel Electric Company (IEC) infrastructure and Bezeq's ongoing deployment of its fibre-to-the-cabinet (FTTC), a development which is helping to drive capacity for its residential and corporate customers' broadband access. © Business Monitor International Page 20 Israel Information Technology Report Q2 2015 Macroeconomic Forecasts Economic Activity BMI View: Accelerating exports and low base effects will lead to faster real GDP expansion in Israel in 2015, and the economy will continue to gather steam over the next five years. On the back of the recent conflict with Islamist group Hamas and prospects for protracted political violence, we have revised down our 2014 and 2015 growth forecasts. Growth in the Israeli economy will pick up in 2015, but the pace of expansion will remain modest. We have recently revised our 2014 growth forecast to 1.6% from our previous projection of 2.4%, mainly a result of the seven-week conflict with Islamist group Hamas in the Gaza Strip in July and August. The economy shrank by 0.4% in the third quarter of 2014 due to the war, the first quarterly decline since Q109 - much the result of a sharp uptick in imports. Low base effects and an uptick in export growth resulting from a weak shekel will trigger the increase in growth in 2015, even as protracted political violence will continue to cloud the outlook. On November 18, four Israelis were killed, and eight injured, in a synagogue in West Jerusalem, only the latest in a series of attacks (see 'Third Intifada Unlikely, But Increase In Violence Ahead', November 6, 2014). Risks to stability will persist as long as a political solution to the Palestinian issue is elusive, and risks of radicalisation in the West Bank will remain high. We forecast real GDP growth of 3.1% in 2015, from our previous forecast of 3.3%. © Business Monitor International Page 21 Israel Information Technology Report Q2 2015 Low Base Effects Key To Rebound In 2015 Israel - GDP 500 8 400 6 300 4 200 2 100 Nominal GDP, USDbn (LHS) 2019f 2018f 2017f 2016f 2015f 2014f 2013 2012 2011 2010 0 2009 0 Real GDP growth, % y-o-y (RHS) f = BMI forecast. Source: Central Bureau of Statistics Israel, BMI. Private Consumption Outlook: Private consumption will accelerate modestly in 2015, and we forecast growth of 3.5% in 2015 from 3.3% in 2014. Consumer spending expanded by 3.9% y-o-y in Q314 - from 1.8% y-o-y in H114 - despite the war in Gaza. Consumer confidence as measured by Bank Hapoalim's Consumer Confidence Index fell by 2.4 points in month-on-month terms to 126.2 in October only 0.2% higher in year-on-year (y-o-y) terms, but we expect a gradual pick up over the next few quarters. © Business Monitor International Page 22 Israel Information Technology Report Q2 2015 Government Unable To Rein In Deficit Israel - Government Revenues & Expenditure 500 -3 400 -3.5 300 -4 200 -4.5 100 0 -5 2009 2010 2011 2012 2013 Fiscal revenue, ILSbn (LHS) Budget balance, % of GDP (RHS) 2014f 2015f 2016f 2017f 2018f Fiscal expenditure, ILSbn (LHS) e/f = BMI estimate/forecast. Source: Israeli Ministry of Finance, BMI For one, we believe that opposition to austerity will result in higher-than-expected fiscal expenditure in 2015. The 2015 budget does not differ significantly from the 2014 document - except for sizeable increases in defence spending and the healthcare sector - as the government tries to rein in a burgeoning budget deficit. However, requests for more spending on welfare from the general public and pressure from the Labour opposition to fight poverty will lead to an acceleration of current spending, which will feed into a modest uptick in private consumption (see 'Government Deficit To Increase In 2015', October 13, 2014). Accelerating export growth will also translate in increased investment in export-oriented sectors of the Israeli economy, leading to increased employment opportunities, particularly from H215 onwards. We see the joblessness rate - which came in at 5.7% in October - to average 5.8% in 2015 from 6.1% in 2014 Government Spending Outlook: We expect public spending in education, healthcare and public services to expand at a relatively robust rate next year as the government proves unable to rein in its fiscal deficit. BMI's Pharmaceuticals research team believes that public spending on health will continue to increase over the coming years. Indeed, the 2015 budget will see an uptick of ILS2.8bn (USD734mn) in funding for the healthcare sector, the second largest increase after defence. Health Minister Yael German said that © Business Monitor International Page 23 Israel Information Technology Report Q2 2015 ILS315mn have been made available to strengthen the public health system, particularly by recruiting additional staff and adding extra beds and equipment. We project government consumption to expand by 3.3% and 3.5% in 2014 and 2015, respectively. Fixed Investment Outlook: We expect growth in gross fixed capital formation to accelerate in 2015, a result of low base effects following a sharp decline in 2014 and increased production due to rising export demand. Israel offers attractive foreign investment incentives, an educated workforce, and a transparent market-oriented economy, making it one of the most attractive destinations for investment businesses in the Middle East and North Africa (MENA) region. The country scores 58.4 out of 100 in BMI's Operational Risk Index, and is placed in fourth place in MENA. Table: MENA - Operational Risk Labour Market Risk Trade And Investment Risk Logistics Risk Crime & Security Risk Operational Risk UAE 57.1 66.3 73.0 59.0 63.8 Qatar 59.3 63.8 61.1 67.7 63.0 Oman 50.4 59.6 62.4 74.2 61.7 Israel 69.7 58.4 64.0 41.7 58.5 Bahrain 58.7 61.6 63.7 48.7 58.2 Saudi Arabia 57.7 54.4 63.0 52.5 56.9 Kuwait 51.6 48.2 54.4 59.8 53.5 Jordan 54.0 56.2 54.9 48.4 53.4 Tunisia 47.0 54.9 53.5 40.9 49.1 Morocco 33.5 47.9 58.6 38.7 44.7 Lebanon 46.4 54.2 53.4 16.3 42.6 Iran 47.3 28.1 46.4 41.7 40.9 Egypt 36.5 38.5 56.9 29.1 40.2 Algeria 38.2 32.7 41.5 36.5 37.2 Libya 43.9 26.0 39.6 11.0 30.1 Iraq 36.5 31.2 41.0 6.6 28.8 Syria 40.1 22.3 34.9 2.3 24.9 Yemen 25.6 25.9 33.1 6.5 22.7 Country Source: BMI Operational Risk Index. Note: Lower Ratings Correspond to Higher Risks. Scores Out of 100. © Business Monitor International Page 24 Israel Information Technology Report Q2 2015 Investment in the Israeli technology segment will contribute to capital formation growth in 2015. On November 11, 2014, US-based software firm Microsoft purchased Israeli security solutions provider Aorato, which develops security solutions to identify suspicious activity in company's networks, for approximately USD200mn. Israel's highly educated workforce and strong links with the US will ensure that Israel's technology and IT sectors will remain highly attractive to foreign investors over the coming years. The five-year outlook for gross fixed capital formation is encouraging, particularly given prospects for increasing investment in the energy industry. In the middle of November 2014, Israel-based Delek Drilling outlined a major upgrade programme for the Tamar gas field. The development plan is linked to a letter of intent signed between Delek and Spanish gas and electricity company Union Fenosa Gas (UFG) in May 2014, for the supply of 70bn cubic metres (bcm) of gas over 15 years to Egypt's Damietta LNG terminal. The Tamar upgrade plan is estimated to cost between USD1.5bn and USD2bn, with a target of nearly doubling production capacity to 20bcm once complete. We project fixed investment to contract by 1.5% in 2014 and expand by 4.0% in 2015, and to grow by 4.5% on average over the next five years. Promising Investment Opportunities Israel - LNG Sector 30 6 4 20 2 10 0 0 -2 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f Dry natural gas production, bcm (LHS) Dry natural gas net exports, USDbn (RHS) f= BMI forecast. Source: IEA, BMI © Business Monitor International Page 25 Israel Information Technology Report Q2 2015 Net Exports: We see Israel recording net export deficits of ILS3.7bn and ILS4.5bn in 2015 and 2016 respectively, from a ILS1.2bn surplus in 2014. Exports expanded by 2.8% in Q314 due to a weakening shekel - which lost 14.1% of its value since the beginning of August 2014 - from a sharp drop in the previous quarter. We expect total exports to contract by 0.5% in 2014 and expand by 2.0% in 2015, primarily as the shekel will remain weak compared to levels seen in H114. A gradual improvement in macroeconomic conditions in the UK, Belgium, the Netherlands and Germany - which accounted for 45.2% of total Israeli exports in 2013 - will also support a return to export growth. Import growth will outpace export growth over the next few years. Total imports expanded by 16.2% in Q314 from a 5.5% decline in Q214; we project the component to expand by 1.5% this year and 3.5% in the next, on the back of an uptick in domestic consumption and fixed investment. Exports And Fixed Investment Crucial To Growth Israel - Real GDP by Component 7.5 5 2.5 0 -2.5 2013 2014f 2015f 2016f 2017f 2018f 2019f Private final consumption, real growth % y-o-y Government final consumption, real growth % y-o-y Fixed capital formation, real growth % y-o-y Exports of goods and services, real growth % y-o-y Imports of goods and services, real growth % y-o-y f = BMI forecast. Source: Central Bureau of Statistics Israel, BMI. Five-Year Outlook Increasing exports and a subsequent acceleration in fixed investment growth will lead to an acceleration in headline growth over the next five years. Growth will increase more rapidly in the latter part of the © Business Monitor International Page 26 Israel Information Technology Report Q2 2015 forecast period, when we expect large-scale gas exports to begin and investment in the energy industry to pick up. We forecast real GDP growth averaging 3.5% over the 2015-19 period. Risks to our five-year outlook are tilted to the downside, much the result of elevated risks to political stability. We do not expect a long-lasting peace agreement between Israel and the Palestinians to be reached over the forecast period, and violence will periodically resurface, which will hit business and consumer confidence. Israel will also continue to face external security threats from Lebanese Shi'a political group Hizbullah and Iran, and we cannot preclude possibility for a military confrontation over the next few years. Table: Economic Activity (Israel 2009-2018) Nominal GDP, USDbn Real GDP growth, % y-o-y GDP per capita, USD Industrial production, % y-o-y, ave 2009 2010 2011 2012e 2013e 2014f 2015f 2016f 2017f 2018f 206.7 233.3 258.4 257.3 290.6 298.3 294.8 314.6 342.7 365.5 1.9 5.8 4.2 3.0 3.2 1.6 3.1 3.4 3.5 3.8 28,415 31,438 34,261 33,664 37,584 38,141 37,227 39,193 42,079 44,217 -5.9 8.1 19.4 7.4 -2.4 -2.8 3.2 3.9 5.0 5.8 Population, mn 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.0 8.1 8.3 Unemployment, % of labour force, eop 7.2 6.6 5.4 6.7 5.9 6.1 5.8 6.0 6.0 6.0 e/f = BMI estimate/forecast. Source: National Sources, BMI. © Business Monitor International Page 27 Israel Information Technology Report Q2 2015 Industry Risk Reward Index Industry Risk Reward Ratings BMI View: MENA (Middle East and North Africa) telecoms markets are gradually moving from being multiple-SIM and voice-centric towards being more rationalised and data-centric. Differences exist between each market, but the development of advanced data networks, such as 3G and 4G, will drive growth, as they are the main internet access technology in the region. However, the security situation will always pose a threat across the development of the sector. BMI's Risk/Reward Index (RRI) Q215 table saw a number of changes this quarter, with only two countries (Israel and Algeria) keeping the same position as a quarter ago. We also added Syria and Yemen to our index, coming in at the bottom at the table, and their low scores have driven down the region's average for the quarter. The overall Telecoms Rating has declined from 51.2 to 48.3, while the score for Industry Rewards has decreased 3 points to 40.2, and Country Rewards 2.4pp to 61.0. A similar trend occurred for our risk indices, with Industry Risks declining 1.9pp to 45, and Country Risks decreasing 4.4pp to 55.5. It is however important to note that both the Country Rewards and Industry Risks indices would have remained the same as a quarter ago without the addition of Syria and Yemen to the RRI. This means that the main changes came from our Industry Rewards and Country Risks indices, and they had the most impact on the overall rankings. Israel stays at the top, and alongside Iraq and Lebanon was the only country to have its telecoms rating improve this quarter. There is strong competition in both the fixed and mobile market, and while the full launch of 4G services, where the spectrum has just been auctioned, will continue to provide some growth, it is likely to do so through lower ARPU and profitability, as six operators won frequencies to launch LTE services. UAE and Qatar complete the podium, overtaking Saudi Arabia which drops to fourth following a 3.9pp telecoms rating decline, the largest of all countries in the index. Bahrain and Kuwait swap places at fifth and sixth, and in seventh comes the largest rise from Iraq, from eleventh a quarter ago thanks to Telecoms Rating increase of 4.2pp, the largest this quarter. While Algeria remains tenth, Oman, Morocco and Jordan all drop places because of Iraq's performance. A similar trend occurred at the foot of the table, where Libya's decline, from twelfth to fifteenth, profits Egypt, Tunisia and Iran, which all move up a place. Lebanon remains sixteenth, but stops being at the foot of the table as Yemen and Syria respectively take the bottom two spots. © Business Monitor International Page 28 Israel Information Technology Report Q2 2015 Excluding Yemen and Syria, twelve of the sixteen countries have seen their overall rankings move from between 0.2pp to -1.7pp. We will look at the exceptions that are Iraq, Kuwait, Libya and Saudi Arabia in more details, but we can explain the low declines in the other countries chiefly though lower subscriptions growth going forward, as the markets become saturated and move from a voice-centric to a data-centric paradigm. As internet access will be mobile, we expect most subscribers to access both voice and data services on a single device, as ARPU will be impacted positively by higher usage but negatively by stronger competition. Bahrain has also seen its country risks index decline by 3.4pp this quarter, as civil unrest and a lower economic growth will impact many sectors in the country. Iraq Outperforms MENA Telecoms Rating Change, Q115-Q215 Source: BMI Iraq Outperforms Its Peers Iraq has seen its telecoms rating increase 4.2 points to 50.9, jumping at the same time four places in the table. While the political situation remains difficult in many regions as it fights the Islamic State, the country also found greater political stability thanks to a new cabinet. But the main reason for Iraq's growth comes from its Industry Rewards index, which increased 10 points to 52.5 in the quarter. Iraq remains an © Business Monitor International Page 29 Israel Information Technology Report Q2 2015 under-penetrated market in terms of subscriptions, and BMI believes the introduction of 3G services, launched by Zain and Asiacell at the beginning of 2015, will drive growth in the country. This should have a positive impact straightaway, as smartphone penetration is already high, and customers will only need to upgrade their SIM cards in order to access new data services. The greater usage should in turn improve ARPU, unless the operators unleash a price war to improve their market share. The launch of 3G will also improve overall internet access, as fixed broadband penetration remains low at less than 1%. Libya, Kuwait And Saudi Arabia Show The Largest Declines Libya, Kuwait and Saudi Arabia are the worst performances this quarter, with their telecoms rating respectively decreasing by 3.4, 3.8 and 3.9pp. However, the reasons for their decline are markedly different for each. Libya has been impacted by the worsening political situation in the country, which has led to a Country Risk score decrease of 22.5pp to 37.1. The country is on the verge of another civil war as several factions continue to jockey for power following the end of the Gaddafi regime. Such a climate negatively impacts many sectors, including telecoms, and this has led our decision to revise the country's rating, especially as the market is unlikely to be liberalised in the short-term. On the other hand, the change for both Kuwait and Saudi Arabia has been led by a decrease in their Industry Rewards scores, declining by 8.3pp to 38.5 for the former and by 8.2pp to 46.8 for the latter. Both countries have high mobile penetration led by the number of expatriates and migrant workers present in the country. But the political situation has led to a clampdown against those foreign workers, and BMI expects lower subscriptions growth going forward through a decline in that particular segment. Furthermore, competition remains high in both markets between the main mobile operators, and the loss of migrant workers, which were on prepaid plans, is likely to exacerbate that trend as providers switch their focus to higher-value postpaid users. Furthermore, Saudi operators have also hit some financial difficulty recently, with Mobily and STC reporting lower profits. Yemen And Syria Start At The Bottom For the first time this quarter, BMI has added Yemen and Syria to its RRI, and it is no surprise to see the two countries having the two lowest rankings, at 36.9 and 30.7 respectively. Both are in the midst of very difficult geopolitical situations, with civil wars raging, and the climate makes developments in any sector difficult at the present. However, Syria has just announced that MTN Syria and SyriaTel had been awarded © Business Monitor International Page 30 Israel Information Technology Report Q2 2015 long-term licenses in the market, which should enable these operators to plan current and future investments with more clarity. But any upside will be dependent on a strong improvement in the security situation. Table: MENA Q215 RISK/REWARD INDEX Industry Rewards Country Rewards Industry Risk Country Risk Telecoms Rating Rank Previous Rank Israel 42.5 90.0 80.0 66.2 63.3 1 1 UAE 57.8 66.0 50.0 68.1 60.2 2 3 Qatar 49.5 72.0 50.0 76.3 59.1 3 4 Saudi Arabia 46.8 69.0 60.0 72.7 58.1 4 2 Bahrain 38.5 69.0 50.0 62.9 51.4 5 6 Kuwait 38.5 78.0 30.0 66.8 51.2 6 5 Iraq 52.5 57.0 40.0 47.1 50.9 7 11 Oman 38.8 60.0 60.0 62.4 50.7 8 7 Morocco 35.0 56.7 70.0 52.4 48.2 9 8 Algeria 40.0 53.0 40.0 65.2 47.0 10 10 Jordan 37.5 60.0 50.0 49.3 46.7 11 9 Egypt 40.0 43.7 55.0 53.9 45.2 12 13 Tunisia 32.5 53.3 60.0 50.4 44.4 13 14 Iran 45.0 49.7 20.0 57.7 44.3 14 15 Libya 40.0 73.3 10.0 37.1 43.2 15 12 Lebanon 26.3 63.3 25.0 45.6 38.1 16 16 Yemen 34.4 42.7 30.0 42.0 36.9 17 New entry Syria 27.5 42.0 30.0 22.9 30.7 18 New entry Average 40.2 61.0 45.0 55.5 48.3 Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60%. The 'Rewards' score evaluates the size and growth potential of a telecoms market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' score evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Index that could affect the realisation of anticipated returns. Source: BMI © Business Monitor International Page 31 Israel Information Technology Report Q2 2015 Market Overview Hardware BMI estimates Israel's IT hardware market returned to positive growth in 2014, up 0.1% year-on-year (y-oy) to ILS9.225bn. We forecast positive, albeit slow growth with a compound annual growth rate (CAGR) of 1.5% over our five-year forecast from 2015 to 2019. In 2013 the value of hardware sales was squeezed by a weaker currency, price competition and the lower unit price of mid-range tablets hitting the market. Helped by an acceleration in private consumption growth, BMI believes that increased take-up of tablets and the end of support to older Windows operating systems boosted sales in 2014. Although BMI's country risk team believes the escalation of hostilities between Israel and Gaza in July put a drag on GDP growth, dropping their initial GDP growth forecast of 3.2% down to an estimated 2.6% for 2014, Israel's ever growing attraction as an IT research and development hub to international firms and its expertise in cyber security have helped to insulate the IT sector from macroeconomic headwinds. Nevertheless, wider economic uncertainty means businesses are now investing more to increase flexibility and realise cost efficiencies rather than expand IT hardware capabilities. Moreover, lower average prices have meant that revenue growth in most segments has lagged shipments. This underpins our view of only a modest recovery in hardware sales in 2014. BMI forecasts Israel's real GDP growth return to positive territory in 2015. Private consumption is also expected to continue growing at a reasonable pace, at an average annual rate of 3.5% between 2015 and 2019. The Israeli government has launched various initiatives to increase computer and internet penetration, such as Computer for Every Child, now morphing into 'Tablet for Every Child' according to Israeli Prime Minister Binyamin Netanyahu, and 'Digital Israel', a proposed initiative to streamline the digitisation of public sector services, such as education, healthcare and social services. The level of support, however, has been criticised by some industry insiders as too low. Between its launch in 1995 and June 2013, the Computer for Every Child initiative reportedly distributed 55,000 computers in around 2,000 localities, representing a tiny fraction of total hardware sales in Israel. Industry stakeholders see Digital Israel essentially as a duplication of its Government Computing Center. The centre was established in February 2012 and operates under the auspices of the Ministry of Finance, with many of the same goals as Digital Israel. However, Carmela Avner, Israel's first chief information officer who headed the centre, announced her resignation in December 2013 owing to the body's lack of power to implement digital initiatives. © Business Monitor International Page 32 Israel Information Technology Report Q2 2015 Therefore, BMI expects upgrades to new systems, Israel's vibrant local start-up and IT research & development markets, and purchases of personal computing devices to remain the bulk of market sales. Mobile computing devices including tablets, slimline notebooks, ultrabooks and hybrids present a key growth opportunity for vendors as consumers increasingly complement household desktop and laptops with more easily transportable devices. Although tablet computers took longer to reach mass popularity in Israel than other mature ICT markets, we expect demand to strengthen from 2014, further supported by an improving private consumption outlook. Meanwhile, the end of all support for Windows XP in April 2014 and of mainstream support for Windows 7 in January 2015 is expected to result in higher sales of the Windows 8 OS in the retail and enterprise markets. In the retail market Windows 8 will deepen the tablet and hybrid PC markets, while in the enterprise sector the new OS should trigger computer hardware tenders previously delayed because of weakened economic growth. Hardware Market (2012-2019) 10,000 7,500 5,000 2,500 0 2012 2013 2014e 2015f Personal computer sales, ILSmn 2016f 2017f 2018f 2019f Servers sales, ILSmn e/f = BMI estimate/forecast. Source: BMI © Business Monitor International Page 33 Israel Information Technology Report Q2 2015 Evolving Form Factors The Israeli IT market is relatively mature, but BMI estimates that hardware still accounted for 39.5% of the total market in 2014 (excluding communications hardware). As the market continues to mature, we expect this to drop to around 33.6% by 2019. Prior to 2012, notebooks were the fastest-growing segment of the market, although as recently as 2008 desktops still took around two-thirds of unit sales. In 2010-2011, however the share of desktops declined precipitously, and then in 2012 there was a shift from notebooks to tablets as the fastest growing segment of the market. BMI estimates that notebooks and tablets accounted for 78% of total PC sales in Israel in 2014, up from 60% in 2009. This trend of preference for mobility is expected to continue over the 2015-2019 forecast period. Despite its declining share of sales, however, the desktop sector is still significant, largely due to business and government end-users. Meanwhile, though take-up of tablets was relatively slow in Israel, the country's consumers embraced the smartphone. According to a Google survey from June 2013, around 57% of Israelis had a smartphone. This chimes with BMI's estimate that 3G subscriptions accounted for around 65% of Israel's total mobile subscriber base at the end of 2013, rising to 71.7% in 2014, with mobile penetration reaching around 127%. The competition from mobile devices is driving innovation in notebook and tablet design, as slim-line and hybrid devices are increasingly the centre-piece of Windows vendors product ranges. The tablet market in Israel has been dominated by Apple. Although Apple has faced tough competition from a broadening pool of tablet vendors, it managed to maintain its dominance of Israel's tablet market in 2013. In line with our expectations, Apple retained its dominance of the tablet market throughout 2014 with data from Statcounter showing that iOS, run on Apple's tablets, accounted for 71.1% of all tablet browsing traffic in Israel in December 2014. This was down by 8.1 percentage points (pp) y-o-y, though, with the Android operating system (OS) accounting scooping up market share to reach 28.1% of tablet browsing traffic by the end of 2014. Although Statcounter data suggest that Apple devices remain by far the most popular among Israeli consumers, IDC estimated that Apple's share of tablet sales dropped considerably in 2013 to 31.4%, down from 49.1% a year earlier. Both data support the trend of a widening range of Android devices - including the Kindle Fire from Amazon, the Nexus 7 and 10, LG G Pad and Samsung's Galaxy Tab range (all launched new or upgraded models in 2014) continuing to chip away at Apple's market share. Statcounter data suggest that Samsung has been the driving force behind the gradual erosion of Apple's dominance, with its share of browsing traffic reaching 13.3% in December 2014, up from 8.3% a year © Business Monitor International Page 34 Israel Information Technology Report Q2 2015 earlier. All other vendors, including Asus, Acer, Google and Sony have browsing market shares below 5%, although Asus' rose from 1.8% in December 2013 to 4.5% a year later. The gap between the strategies of some of the leading players is worth noting. On the one hand Apple and Samsung are hardware vendors and look to profit from the sale of devices, while on the other side Google and Amazon are services firms and offer tablets almost at cost. The strategies of services firms (combined with low cost original equipment manufacturer [OEM] tablets from China) will likely put pressure on the margins of hardware centric vendors in the medium term. However, the tablet market remains relatively undeveloped in Israel's hardware sector, which is heavily dominated by Windows machines. When looking at the combined tablet and desktop/laptop computer market, iOS and Android accounted for just 3.8% and 1.5% of total PC browsing traffic, respectively, by the end of 2014 (this is nevertheless up from 2.2% and 0.9% of browsing traffic a year earlier). The event with the largest impact on Israel's PC market was the launch of Windows 8 in October 2012, which enabled Windows vendors to introduce touch devices; a number of tablets were released throughout 2013 and 2014. The addition of more vendors and another touch OS has added to competition in the market and put further downward pressure on prices. Another significant development is the medium term impact on innovation and form factors. Windows has a traditional strength in productivity use cases and software, with the OS being central to the enterprise market and Microsoft's ubiquitous Office Suite. There is therefore an opportunity for vendors to leverage this strength over rival iOS and Android devices by designing tablets with strong productivity functionality alongside the passive media consumption features. Early examples were hybrid devices such as Microsoft's own Surface (RT & Pro), Hewlett-Packard's (HP) Envy and Lenovo's Yoga and Helix. Although design innovation still has room to improve, prices have started to come down and the multi-use device has scope to capture a share of the tablet market by offering a stronger value proposition to consumers while not compromising on user experience. In its latest earnings result, for the quarter ended December 2014, Microsoft stated that the newer Surface Pro 3 is outselling is predecessor the Surface Pro 2 by a ratio of 3 to 1, indicating that consumers are beginning to embrace the new form factor. The success of lower cost Windows 8 powered PCs is reflected in the latest Statcounter data, which show that Window 8 and Window 8.1 accounted for almost 15.9% of browsing traffic in Israel in December 2014, up 7.7pp from 8.2% a year earlier. By comparison, Mac OSX's share of browsing traffic increased by 2.2pp, to 5.1% over the same period. © Business Monitor International Page 35 Israel Information Technology Report Q2 2015 Israel PC Browsing Traffic By OS (%) And y-o-y Change (pp) December 2014 Source: Statcounter Vendor Performance The Israeli PC market has undergone significant changes in terms of market shares. In the PC market, the top three vendors, HP, Lenovo and Dell, had enjoyed a combined market share approaching 50%, but while Lenovo has gone from strength to strength, HP and Dell have been hit by competition from Asus and Samsung - as well as the shift to tablets. Most PC market growth in 2012 was driven by the mobile PC segment, and in fact notebook sales declined and growth was solely driven by tablets according to research from IDC. IDC's data for 2012 show that laptop sales declined 16.4% from 2011 to 2012, falling to around 427,000, in contrast to a 20.2% increase in tablet sales to around 226,000. In the laptop market Lenovo leapt to top spot with a market share of 21.2%, overtaking HP and Dell. In second position was Asus with 16% market share, also overtaking HP and Dell which both had 15.2% market share in 2012. Chinese giant Lenovo has built its strong position in the Israeli market following its purchase of IBM's PC unit in 2005, and through increased investment into the country. In 2012, Lenovo claimed that it had top spot in the commercial laptop market in the country, and that it was the second largest PC vendor overall. © Business Monitor International Page 36 Israel Information Technology Report Q2 2015 Acquisitions and strategic investments are part of Lenovo's strategy to consolidate its position in the Israeli market, and in February 2012 the vendor announced that it would invest in Vertex Venture Capital's new venture capital fund. The investment is aimed at helping Lenovo to build a solid R&D base in the country, with priority areas including enterprise IT, infrastructure and greentech, and digital media technology and applications. In September 2014 Lenovo's senior vice president met with hundreds of Israeli start-ups and suggested that the company was considering establishing a research and development (R&D) centre in the country. Lenovo is far from the only multinational PC vendor to be increasing its R&D investment in Israel. In 2012 Apple opened a research centre in Haifa and in December 2013 it opened its third Israeli research centre in Ra'anana. Dell set up an R&D centre in the country in 2011, Toshiba announced plans to open one in early 2014. In 2013, Samsung announced it would open of its three global innovation and strategy centres in Ramat Gan, Israel (the other two are in Silicon Valley and South Korea). Software BMI estimates that Israeli software spending increased to ILS5.87bn in 2014, up 6.2% y-o-y. We expect growth in the software segment to accelerate, with a CAGR forecast of around 6.5% over the five years to 2019. In the past few years, there has been a pick-up in demand for systems and upgrades in public and private sectors, with investments by government organisations such as the Israeli Ministry of Defense and Israeli Police, and from utilities leader Israel Electric Company. Much of this growth is related to increasing use of cloud services and related rising demand for security services. In 9M14, leading software vendors in the Israeli market reported steady, single-figure growth, much in line with our forecast. Leading Israeli software and services group Formula Systems-owned Matrix, which derives most of its revenues from the Israeli market, reported 7.9% revenue growth during 9M14 (see Matrix Company Profile for further details). Opportunities for software vendors in Israel exist across a range of sectors; from government to energy, financial services, telecoms and utilities. Major customers for software solutions in Israel include large and medium enterprises such as commercial banks, loan and mortgage banks, credit card companies, insurance companies, telecoms service providers, hi-tech companies, and the Israeli Defense Forces, government ministries and public agencies. Large organisations investing in SAP-based systems included the Meitav Regional Water and Sewage Corporation and Israel Direct Insurance (IDI). Meanwhile, the small- and medium-sized enterprise (SME) segment, the mainstay of the Israeli business sector, has emerged in recent years as an important growth area for enterprise systems. The SME sector will © Business Monitor International Page 37 Israel Information Technology Report Q2 2015 become increasingly important in 2015, as the government cuts on non-essential spending in order to service debts relating to the June-August war with Gaza. SME spending on enterprise solutions should continue to grow steadily, with reviving or emerging areas of opportunity including security, customer relationship management (CRM) solutions and business intelligence. Software Market (2012-2019) 10,000 7,500 5,000 2,500 0 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f Software sales, mn e/f = BMI estimate/forecast. Source: BMI Migrations to the Windows 8 operating system are believed to have had a positive impact on 2013 and 2014 sales. Microsoft touted the touchscreen capabilities of Windows 8 and Q412 saw the release of a new wave of Windows 8 tablets and notebooks. Following several upgrades to the Surface Pro, in January 2015 Microsoft announced the Surface Hub, an 84- or 55-inch multi-touch and multi-pen 4K wall mounted screen device, aimed at business users, and which will run the newest Windows 10 OS. A large majority of Israeli computer users have already switched away from Windows XP, which dropped as a share of browsing traffic from 19.4% to 10.3% over the 12 months to December 2014, to Windows 8/8.1, which saw its share increase by 7.7pp to 15.9% over the same timeframe. Nevertheless, Windows 7 remains by far the most popular OS, accounting for 60.8% of browsing traffic in December 2014, down by just 2.6pp y-o-y according to Statcounter data. BMI believes the trend will continue throughout our forecast period, with consumers and businesses only gradually migrating to the Windows 8/8.1 OS. © Business Monitor International Page 38 Israel Information Technology Report Q2 2015 Current areas of enterprise demand include management of Microsoft systems and servers, as well as systems management, basic data management, firewalls, enterprise resource planning (ERP) implementation and CRM. The sheer volume of data that enterprises must now handle as a result of device proliferation is fuelling investments in business analytics. In May 2013, Arad Group, a world leader in water meter technology, announced a partnership with IBM to help customers and water utilities manage resources more efficiently through use of big data and analytics technology. The analytics technology was developed by IBM in Israel. The security software segment is one of the fields with the greatest opportunity in Israel, potentially worth hundreds of millions of dollars over the medium term as awareness of security issues grows in tandem with the rise of cloud computing. Owing to the country's geopolitical situation, Israeli companies, organisations and the government are highly sensitive to cyber threats, and local IT firms have responded to the heightened demand by developing some of the world's most advanced IT security software. BMI believes research and spending is likely to continue across all software segments, although with security content and threat management remaining the current priorities. In October 2012 Israel's Prime Minister Binyamin Netanyahu announced that the government was working to create a 'digital Iron Dome' to protect vital infrastructure from hackers and viruses (the Iron Dome is Israel's anti-rocket defence system). This included the establishment of the National Cyber Bureau to defend the nation against computer terrorism. This policy should see vendors win public contracts, while also serving to focus the minds in the private sector, although at the time of writing no major contracts had been publicly announced. In October 2014, Netanyahu announced further plans to establish a National Cyber Defense Authority, which will protect civilian cyberspace as well as vital security facilities. Due to its sensitive geopolitical position and supported by its well-educated population, Israel has a vibrant domestic cyber security market. Check Point, Imperva and CyberArk are listed companies, while in March 2013 Israeli security services company Incapsula, an Imperva subsidiary, was valued at around USD950mn after proving successful among SMEs. Incapsula provides high-end firewalls to assess incoming traffic and identify possible bugs. Incapsula was established in 2009, created by three Imperva employees. The growing emphasis of many multinational IT vendors on software and services revenues has led several of them to direct more investment into R&D at the Israeli market. In June 2014, Israeli security analytics company Fortscale announced that it raised USD10mn in funding from Intel Capital and Blumberg © Business Monitor International Page 39 Israel Information Technology Report Q2 2015 Capital to expand its R&D program. Also in June, cyber security start-up Hexadite announced a USD2.5mn in seed funding for its operations. In July 2014, Microsoft, cloud services provider Akamai Technologies and Jerusalem Venture Partners (JVP) collaborated to work on a cyber security accelerator. The move is in line with Microsoft's effort to provide start-ups with a programme and market expertise to aid them in accelerating their business and to create milestones in cyber security. At the end of the programme, one of the cyber security start-ups will be provided with an investment of USD1mn. Earlier in 2014, IBM also announced plans to open an IT security centre in Beersheva, while Cisco and Lockheed Martin both announced plans to increase their investments in the development of the country's IT sector. Israel's strong reputation as a hotbed for innovative software development has made Israeli companies popular takeover targets for multinationals. In September 2013, IBM completed its acquisition of Israeli-US enterprise security firm Trusteer, for an estimated USD1bn. Trusteer's customers reportedly include seven of the top 10 US banks and nine of the top 10 UK banks. More recently, in April 2014 US-based Palo Alto Networks confirmed its acquisition of Tel Aviv-based Cyvera, which has developed software to protect computers running Windows software, including ATMs, from unknown, zero-day cyber attacks. Palo Alto did not confirm the value of the transaction, but industry experts estimated it at around USD200mn. Meanwhile, European enterprise software leader SAP is also looking to leverage the skills base of the Israeli market as it focuses on three key technology areas: mobile, in-memory computing and cloud computing. SAP is developing more mobile business applications that could be deployed across a variety of devices, including tablets. In-memory computing, a technology which SAP is developing through its HANA solution, is expected to revolutionise the way companies handle big-data. SAP Labs Israel has been at the forefront of SAP's work in this area, with more than 100 local developers participating in the development of the HANA in-memory solution. Israeli developers were also responsible for the creation of the company's Real Time Offer Management solution, which is currently being tested by French supermarket chain Casino. Given the current focus of many businesses on controlling costs, the pay-ondemand software-as-a-service (SaaS) model has grown in popularity and spread beyond the initial core application area of CRM. New cloud computing offerings and increased competition in this segment should fuel further demand from users. As well as cost savings, businesses will look to boost efficiency and increase flexibility of response to customer needs. Large businesses are most likely to put IT applications such as mail, phone systems and document management into the cloud. However, enterprise applications that require a high level of customisation, or which are subject to regulatory or data-sensitivity constraints, are more likely to stay on premise. © Business Monitor International Page 40 Israel Information Technology Report Q2 2015 In terms of verticals, the financial sector has been a mainstay of demand, with other key areas including defence and healthcare. IT spending from the financial services vertical has been positively impacted by regulatory reform and changes affecting banking and insurance in the wake of the global financial crisis. Such changes generated demand for specific IT solutions, often in a set time period. Israeli legislation passed in 2010 and 2011 increased Israeli Securities Authority regulatory supervision over the offering of investment services and administration of investment portfolios. This in, turn, increased demand for solutions for entities that became subject to such supervision. Similarly, defence spending on new systems is likely to be maintained, given increased security risks following eruption of violence between Israel and Gaza in June 2014 as well as the destabilising impact of Islamic State on the wider region. In April 2014, Israeli news portal Jerusalem Post reported that the Israel Defense Forces (IDF) is developing its own cloud computing network, which it expects to launch by the end of 2014. The cloud computing platform will reportedly allow commanders to receive real-time intelligence on enemy targets and friendly forces from remote locations. The IDF is also implementing other IT solutions to strengthen its operations, such as a specialised training programme for open source technologies Python and Ruby on Rails. In August 2013, the IDF also launched an internal platform called Yohanan, which allows soldiers to use open-source software components created within the military organisation. Services The IT services segment is estimated to have reached a value of ILS8.26bn in 2014. BMI forecasts this to continue expanding at a CAGR of 4.9% over the next five years to reach ILS11.18bn in 2019. In 9M14 vendors reported a continued flow of new projects in sectors such as government, financial services, homeland security and utilities. Matrix's chief rivals in its domestic IT services market include fellow Israeli IT services giant Ness Technologies (whose local segment Ness Israel was acquired by Hilan in June 2014) as well as TeamMalam, One-1, Taldor Computer Systems, the Elad Group and Yael. These local firms also compete with international players such as HP and IBM. International vendors in the Israeli market often work with local subcontractors. The IT services market is affected by regulatory reform, which influences and drives demand in sectors such as; government, with much spending related to e-government targets; financial services, where an increase in regulatory supervision has necessitated new IT investments; and telecoms, where spending is driven by the roll-out of new platforms and services. In August 2012, Ness was awarded a 10-year contract from Israel's Ministry of Finance to establish and operate the country's new National Long-Term Savings and Insurance Exchange. The new exchange is expected to streamline work processes, and provide the © Business Monitor International Page 41 Israel Information Technology Report Q2 2015 public with information about the retirement savings and insurance plans on offer. So important is the project to Ness that the company established a dedicated subsidiary to develop and operate the National Exchange, including a service and support centre. IT Services Market (2012-2019) 15,000 20 15 10,000 10 5,000 5 0 0 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f Services sales, ILSmn (LHS) Cloud computing spending, % of IT market (RHS) e/f = BMI estimate/forecast. Source: BMI Defence and government spending represent a significant component of Israeli IT demand and have some immunity to economic vicissitudes. The Ministry of Defence has awarded a number of multimillion-dollar IT contracts, including a USD10mn tender for a new command and control system and a data centre contract awarded to VMware in December 2013, which Jewish Business News valued around USD27mn. One potential demand driver will be organisations looking for help to utilise efficiencies from cloud computing, such as SaaS and infrastructure-as-a-service (IaaS). In 2011, vendors such as Alcatel-Lucent have continued to invest in new cloud computing facilities in Israel, leveraging the country's expertise. While large organisations still dominate demand for services, SMEs have also been investing more, representing a growth opportunity. Many SMEs are waking up to the need to compete through more direct © Business Monitor International Page 42 Israel Information Technology Report Q2 2015 investment in support and service infrastructures. These factors are driving an increase in demand for managed services among SMEs, which are keen to leverage the operational efficiencies offered by SaaS and IaaS solutions. In 2013 HP's IT services operations in Israel suffered a setback as communications equipment vendor ECI sued HP Israel for ILS38mn in April 2013, claiming HP did not meet the terms of an agreement to upgrade its computer systems. In 2010 ECI contracted HP to provide its computing requirements including maintenance support and upgrades in a deal worth USD120mn over 10 years. This made it one of the largest such contracts in Israel, and ECI became one of the first Israeli companies to switch to cloud computing and utilise a server farm in France. However, HP cancelled the contract in February 2013, claiming ECI had breached the contract and was in arrears. ECI claimed HP had failed to provide services promised, meeting none of the eight milestones it had set for April 2011 and the cloud computing element was only supporting 900 users, rather than ECI's 3,000 employees, as required. In May 2013, HP counter-sued ECI for ILS83mn for breach of contract. At the time of writing, there was no further news on developments in the court cases. Outsourcing Although Israel seemingly possesses many advantages as an outsourcing destination (in particular a technologically literate, linguistically skilled workforce and low labour costs relative to most developed countries), the country has failed to capitalise on these strengths. Aside from Israel's small size, security also weighs on the country's attractiveness as an outsourcing destination. However, the government began promoting Israel to multinationals several years ago, which has resulted in a spate of call-centre construction projects. The work seems to be paying off, with Israel starting to emerge as a desirable location for packaged applications and localisation services. Matrix also competes in Israel's offshore IT outsourcing market. © Business Monitor International Page 43 Israel Information Technology Report Q2 2015 Industry Trends And Developments Israel stands out as a major investment destination for IT software development in the Middle East. This is due to a combination of factors, including a relatively large defence budget, with a considerable proportion spent on IT products and solutions, a large pool of domestic skilled labour, and a high technologypenetration rate. Many of the biggest global technology firms run Israeli research centres, including Cisco Systems, Microsoft, Google, Apple, IBM, Oracle, SAP, EMC, Motorola, Hewlett-Packard (HP), Facebook, and eBay. Intel Makes Record-Breaking Investment In Israel Intel is set to remain ingrained in the Israeli IT market over the long term, following news in April 2014 of plans to invest around USD6bn to upgrade its Kiryat Gat chip plant, according to a statement by Israel's economics minister, Naftali Bennett. The Israeli government approved the plan in September 2014, confirming that it will give Intel a grant of USD300mn over five years. Intel will also be allowed to pay a corporate tax rate of just 5% for a 10-year period. In exchange, by 2023 Intel will create an additional 1,000 jobs at the chip centre, which currently employs around 2,500 people. In February 2013 Intel Israel reported its exports more than doubled to USD4.6bn in 2012, from USD2.2bn in 2011. Over the same period Intel's Israeli workforce increased 10% to 8,500, as over the course of 2012 it invested USD1.1bn in Israel. Intel Israel says Intel Corporation has invested USD10.5bn in Israel over the past decade, and received USD1.3bn in Israeli government grants. It is estimated Intel accounts for 10% of Israel's total industrial exports, and one third of exports to China. Without the contribution of Intel, hightech exports would have declined by 10% in 2012, according to the company's own estimates. Israel As A Global Research And Innovation Hub In October 2014 global software security provider Kaspersky Lab announced plans to open a development centre in Israel in 2015. The centre will initially be small, with just six employees, but Kaspersky reportedly has plans to increase its R&D base in the country over time. Also in October, Spanish telecoms company Telefónica teamed up with Israel-based Van Leer Xenia Ventures (VLX Ventures) to invest in Israeli start-up companies. The focus will be on developing the Israeli start-up tech companies in the video, cloud computing, big data, smart homes, wearable technology © Business Monitor International Page 44 Israel Information Technology Report Q2 2015 and future communication sectors. The Israeli companies will be given investment capital along with the opportunity to scale their products to more than 300mn customers of Telefónica throughout the world. In May 2014 French telecoms network equipment vendor Alcatel-Lucent announced plans to open a Bell Labs branch near Tel Aviv. The new unit will be based in Alcatel-Lucent's existing cloud facility in Kfar Saba and focus on further cloud research, in order to help the vendor's transition from telecoms generalist to specialised expertise in areas such as network virtualisation. In April 2014, IBM announced the launch of its Alpha Zone technology accelerator in Tel Aviv, which will recruit start-ups to grow technologies across several areas, including big data, cloud, mobile, security and the Internet of Things. IBM Israel's Country General Manager, Rick Kaplan, also stated that Alpha Zone could play an important role in supporting IBM's push to develop commercial applications for its Watson supercomputer. IBM will recruit start-ups for 24-week sessions, during which time they will provide office space, mentorship and exposure to investors, while allowing the businesses to retain the rights to their innovations. In February 2014, IBM also announced plans to open a Center of Excellence for Security and Protection of Infrastructure and Assets in collaboration with Ben-Gurion University in Beersheva, Israel. This follows IBM's acquisition of US-Israeli enterprise security firm Trusteer in September 2013. Trusteer's customers reportedly include seven of the top 10 US banks and nine of the top 10 UK banks. The value of the transaction was not revealed, but industry experts estimate that it was in the vicinity of USD1bn. In January 2014, Cisco announced plans to invest tens of millions of dollars into Israeli venture capital fund JVP. The main areas of focus for the fund are digital media, cyber security and storage technologies. The cyber security segment of the fund is expected to raise around USD120mn, which will be invested into working with the government and local start-ups to create a cyber-lab. In January 2014, Lockheed Martin and EMC Corporation announced a new partnership to establish a joint centre in Beersheva. EMC is a leading player in Israel's information security market, while Lockheed Martin has mainly operated in the aviation and defence products sector. This news followed the revelation that Lockheed Martin plans to compete in the tender for the IDF Intelligence Corp's Five Industries technology campus in the Negev and expand its computer services segment in Israel. © Business Monitor International Page 45 Israel Information Technology Report Q2 2015 Israeli Start-Ups Attract Global Attention IVC Research Center and KPMG Somekh Chaikin research shows that the eruption of violence between Israel and Gaza between June and August 2014 did not have any impact on capital raising in Israel's high tech sector, which reached a record high of USD3.4bn in 2014, compared to 2.3bn in 2013. Internet and software companies also increased their share of total capital raised in 2014, accounting for 28% and 22% of total investments respectively, compared to 22% and 21% in 2013. The value of investments is also on the rise, as the average investment per company increased from USD3.2mn in 2012 to USD4.9mn in 2014. In January 2015, Amazon announced that it had agreed to acquire Israeli chipmaker Annapurna Labs, for up to USD370mn. The company will merge with Amazon's cloud computing business, Amazon Web Services, and will form the foundations of a research and development centre in Israel. In the same week, Dropbox announced that it had closed a deal to acquire CloudOn, a developer of mobile productivity tools based in Herzliya, Israel. Rather than acquiring the company for its products, however, Dropbox announced that CloudOn's service will be shut down in March and that its 30 employees will begin working on Dropbox products. The Israeli office will serve as a base for Dropbox's aggressive expansion of its employee base in the country. In July 2014, Qualcomm completed the acquisition of Israeli wireless gigabit chip developer Wilocity. Qualcomm has been working with Wilocity since 2008 to develop high-capacity and high speed chips for smartphones, tablets and other mobile devices. The financial terms of the deal were not reported, but industry experts estimated the value of the acquisition at USD300mn. In March 2014, US-based Palo Alto Networks confirmed the acquisition of privately held, Tel Aviv-based cyber security firm Cyvera. The financial terms of the acquisition were not confirmed, but industry experts expect the total value of the transaction was around USD200mn. Cyvera's software protects businesses from cyber security threats by blocking unknown, zero-day attacks on computers running Windows software. Palo Alto plans to expand the software for Apple computers and mobile devices running Android and iOS. Also in March 2014, US-based Secure Alert announced plans to acquire Israel-based GPS Global Tracking & Surveillance. The transaction was estimated at around USD11mn. The Israeli company specialises in developing technology for locating and tracking people and vehicles. On the back of the acquisition, Secure Alert intends to set up a research and development centre in Israel, following the lead of many global IT firms. © Business Monitor International Page 46 Israel Information Technology Report Q2 2015 In February 2014, Israeli data protection and management firm Varonis Systems launched its initial public offering (IPO) on Nasdaq. The company raised about USD106mn in the IPO, with a starting price of USD22 on 4.8mn shares. By the end of the first day of trading the company's share price had already doubled to USD44. Despite a strong start as a public company, by July 2014 Varonis' shares dropped down below their initial USD22 valuation. This may have been related to widening losses in Q114. In June 2013, Google acquired Israeli live mapping service Waze for USD966mn. Google intends to integrate Waze's traffic features and crowd-sourced data into its Google Maps platform. In June and August 2013, the US Fair Trade Commission (FTC) and the UK Office of Fair Trading (OFT) both undertook investigations on whether the acquisition posed a threat to competition in the navigation applications segment. The two agencies approved the merger in October and November 2013, respectively. In March 2013 CA Technologies agreed to purchase Israeli app deployment and management company Nolio for USD40-42mn. Nolio provides software that automates application deployment and allows IT staff to maintain, manage and recover these enterprise applications. Chinese Investors Join The Fray In September 2014 Chinese insurance group Ping An Insurance Co. participated in a USD85mn funding round for IronSource, whose technology enables content developers to reach target audiences and monetise their products and services on both desktop and mobile platforms. The company is reported valued at around USD1.6bn and is expected to launch an IPO in 2015. Meanwhile, in December Ping An Ventures announced that it would co-lead a USD27mn investment round for Israeli online trading platform eToro Group. In November 2014, Chinese search engine Baidu executives visited Israel to meet with local startups and in December announced a USD3mn investment in Pixellot, a company that develops video cameras that can be controlled remotely. In January 2015, Alibaba also made its first Israeli tech investment in Visualead, which creates colourful and animated QR codes. Alibaba had already partnered with Visualead for several years, incorporating its QR codes into its Alipay online payment system. Alibaba stated that the lively QR codes have been key to enhancing customer engagement and building up its online-to-offline (O2O) sales strategy. The estimated value of the investment is USD6-9mn. © Business Monitor International Page 47 Israel Information Technology Report Q2 2015 BMI believes Baidu and Alibaba are also likely to follow US and European companies' lead in using their interests in Israeli start-ups as a springboard to launch research and development centres in the country, and benefit from its large pool of highly skilled tech developers. E-Services As part of its modernisation agenda, the government is also pressing ahead with various other strands of its e-government project. Among other initiatives, there has been spending on computers in healthcare and the nationwide paperless court initiative. The e-government programme is leading to increased demand for computers, with the Israeli government reaching a supply agreement with Dell and HP. The government chose Microsoft search technology to power its government services portal, gov.il. In January 2014 the government of Israel announced it had signed a memorandum of understanding (MoU) with Google, which will help the government improve its online services. Under the partnership, Google will promote the development of e-government services in the education, health and welfare sectors in cooperation with local start-ups. Google planned to do this by sharing its expertise and software in cloud computing and the Android OS with local developers. Israel also signed a MoU with the UK in March 2014 to develop digital services based on open source systems. This is an extension of the two countries' existing relationship in the IT sector, which includes the TeXchange programme which brings Israeli entrepreneurs to London to meet other entrepreneurs, investors and potential customers, and the UK's establishment of a Tech Hub in Israel in 2012. In 2012, Israel's Ministry of Finance launched a major new project to establish and operate the country's new National Long Term Savings and Insurance Exchange. The new exchange is expected to streamline work processes, and provide the public with information about the retirement savings and insurance plans on offer, including pension plans. The project was awarded to local company Ness Technologies, which will establish a dedicated subsidiary to develop and operate the National Exchange, including a service and support centre. When the system comes online, officials expect it to provide a boost to the economy, when hundreds of millions of shekels are freed up as pension holders claim what is theirs. © Business Monitor International Page 48 Israel Information Technology Report Q2 2015 Regulatory Development Table: IT Regulatory Authorities Government Authority Ministry of Science, Technology and Space Minister Yaakov Peri Source: BMI The Ministry of Science, Technology and Space has undergone numerous name changes and received its current name in 2013. The ministry's responsibilities include forming a national science and technology policy, coordinating research areas and technological analysis and organisation. The main priorities for the ministry are as follows: ■ Establishing a national policy and priorities for research and development (R&D); ■ Developing scientific and technological infrastructure; ■ Establishing and strengthening foreign scientific relations; ■ Participating in the establishment of research centres, including regional R&D centres; ■ Participating in the development of scientific and technological human resources; ■ Increasing awareness of science within the public, especially the youth of Israel; ■ Developing digital infrastructure (facilitating access to information); ■ Consulting the government and its offices in the area of science and technology. Cyber Security In October 2012 Israel's Prime Minister Benjamin Netanyahu announced the government was working to create a 'digital Iron Dome' to protect vital infrastructure from hackers and viruses (the Iron Dome is Israel's anti-rocket defence system). This includes the establishment of the National Cyber Bureau to defend the nation against computer terrorism. The announcement follows a series of cyber attacks linked to political tensions in the Middle East, including attacks on Israeli institutions, as well as Saudi oil companies and banks in the UAE. In January 2013 Netanyahu opened a national programme to train teenagers in the skills of cyber security. The programme accepts high achieving students for a three-year training programme to intercept malicious © Business Monitor International Page 49 Israel Information Technology Report Q2 2015 attacks. The government is hoping the programme will deliver the skilled professionals needed to meet escalating cyber threats in the region and globally. In January 2014, the National Cyber Bureau announced that it intends to launch a task force which will help consumers and businesses respond to cyber attacks. This cyber emergency response team will provide assistance to individuals and companies that fall victim to cyber attacks, as well as facilitate the sharing of information pertaining to cyber threats. Israeli Prime Minister Binyamin Netanyahu announced in September 2014 that the country would further bolster its cyber defence capabilities with the establishment of a National Cyber Defense Authority (NCDA). The new body will protect civilian cyberspace as well as vital security facilities, in order to respond to the government's concerns over Iran's enhanced cyber warfare abilities. The NCDA will work in collaboration with the existing Israel National Cyber Bureau. Government Approves FTTH Build In January 2013 Israel's government agreed to allow a consortium of privately owned companies to join forces with the state electricity utility to begin building the country's first alternative next-generation fibreoptic backbone. The roll-out should increase competition in high-speed internet access and lower prices opening up new opportunities for IT vendors in terms of devices sales and services to consumers. In June 2013, a consortium led by Sweden's ViaEuropa won a tender for a fibre optic communications infrastructure joint venture with the Israel Electric Corporation (IEC). The joint venture, 60% owned by the ViaEuropa consortium and 40% owned by the IEC will build, operate and manage the new 25,000km fibre-to-the-home (FTTH) network. The aim is for construction on the multi-billion shekel network to begin before the end of 2013, and for coverage to reach two-thirds of the population by 2020. ViaEuropa will own a 50% share of the consortium, with four Israeli investors - BATM Advanced Communications and Rapac Communications, Tamares Telecom and Bynet Data Communications - each owning a 12.5% share. Government To Invest In Dual-Use R&D In January 2013 the Ministry of Finance, Ministry of Defence and Ministry of Industry, Trade and Labour announced a joint budget of ILS30mn for R&D for technologies with civilian and military applications. Each ministry contributes one-third of the funds to the programme. The programme has already identified 17 projects of potential dual-use, including some software research. © Business Monitor International Page 50 Israel Information Technology Report Q2 2015 Background All major vendors have a direct presence in Israel, employing substantial numbers of staff. For example, IBM has its only IBM Global Services regional subsidiary in Petach Tikva and employs around 2,000 staff at its Haifa Labs and various IBM facilities in Rehovot and Jerusalem. Hewlett-Packard (HP) has as many as 4,000 employees and offers services and support through its subsidiary HP-OMS. Other vendors such as Oracle and EDS also have a sizeable presence. Foreign direct investment (FDI) first started to play a key role in Israel's economy in the mid-1990s as the country's high-tech sector underwent a rapid expansion. As well as the opening up of the financial and telecoms sectors, the high-tech sector succeeded in attracting large FDI inflows. The government's policy made foreign high-tech companies eligible for government grants covering 38% of the cost of new research and development facilities. Today, Israel has more offshore R&D centres of US high-tech companies than any other country. Local companies also have a significant presence in the Israeli IT market, with seven of the top 10 IT services firms being Israeli. Major players include Matrix, Ness Technologies and Malam Group, with Israel typically accounting for 40-50% of their revenue. Table: Government Initiatives Initiative Details Gov@Net Government intranet A cross-government intranet planned to connect more than 80 governmental networks and hundreds of institutes. The implementation will create the largest Israeli IP-VPN. The project will allow efficient internal communication and resource sharing. Mercava Government ERP Mercava is the largest ever IT project implemented in Israel. It will gradually replace the assortment of unique legacy systems currently operating in governmental bodies with a central, unified enterprise resource planning (ERP) system running on SAP system software. This project will create a unified language for cross-government activities. Government EIP This project is intended to promote enterprise portals within the government. Since a cross-government portal will be based on information received from the different bodies, the first step involves the construction of a ministry-level portal. This portal will draw information from Merkava, ministry-specific operational systems and intra-government shared resources. Tehila Government ISP The Government ISP project has been operational since 1998, providing essential infrastructure for publicgovernment communication. To date, 60% of the governmental bodies have voluntarily joined the project. Shoham - Ecommerce infrastructure and service A central e-commerce service allowing citizens and companies to access a uniform interface to carry out a variety of payments and purchases, including the payment of taxes, fees, fines (VAT, vehicle and driving licence fees, traffic fines), and the purchase of tangible goods (government publications). The service processed more than ILS250mn in its first year. © Business Monitor International Page 51 Israel Information Technology Report Q2 2015 Government Initiatives - Continued Initiative Details Lehava project Group of initiatives to help close digital divide. Source: BMI © Business Monitor International Page 52 Israel Information Technology Report Q2 2015 Competitive Landscape International Companies Table: Intel Address Matam Bldg 6 PO Box 1659 Matam Industrial Park Haifa HA 31015 Company History Intel Israel was originally founded in Haifa in 1974 and has grown to become one of the most important enterprises in the country. Intel Israel now employs over 9,800 people, making it the country's largest private sector employer. Intel states it invested USD10.5bn in Israel in the decade to 2012, and received USD1.3bn in Israeli government grants. It is estimated Intel accounted for 10% of Israel's total industrial exports in 2012, and one-third of exports to China. Without the contribution of Intel, high-tech exports would have declined by 10% in 2012, according to Intel estimates. Services And Products Intel operates four design centres and two fabrication plants in Israel, including the Fab28 plant at Kiryat Gat, Intel's largest producer of 22nm chips. Intel's Israeli operations have centred on the development and production of microprocessors for desktops, notebooks, mobile devices and workstations. Intel teams also work on connectivity products and security technologies. Milestones for Intel's Israeli operations include the development of the Pentium M microprocessor, in 2003, a major catalyst for the boom in notebook sales, and the Merom in 2006 which helped boost Intel's presence in the server market. The Sandy Bridge and Ivy Bridge family of processors were also designed and manufactured in Israel, with Sandy Bridge becoming the fastest selling product in Intel's history. In late 2014 Intel launched a new Internet of Things (IoT) platform, which aims to simplify the connectivity and security of web solutions, and enable IoT solutions to be customised according to consumer and business needs. Intel has launched a series of hardware and software products based on the new platform. This includes the SkyLake chip, which will enable computers to power up and link to peripheral devices through wireless technology. It is due to launch in 2015 and be available in new laptops by the end of the year. Intel has also partnered with AT&T, Cisco, GE and IBM to promote compatibility and security of its IoT solutions. Company Developments ■ ■ ■ ■ In 2014 Intel Capital revealed that it spent USD62mn to support 16 startups, including two Israeli companies: Screenovate Technologies and Stratoscale. Screenovate develops technology enabling users of project video content wirelessly from smartphones and tablets to TV displays. Stratoscale develops data storage infrastructure which will improve efficiency and scalability in the management of data centres. In April 2014 Israel's Economics Minister, Naftali Bennett, stated that Intel will invest around USD6bn to upgrade its Kiryat Gat chip plant. This is the largest single investment by a foreign company in Israel. The Israeli government approved the plan in September 2014, confirming that it will give Intel a grant of USD300mn over five years. Intel will also be allowed to pay a corporate tax rate of just 5% for a 10-year period. In exchange, Intel will create an additional 1,000 jobs at the chip centre, which currently employs around 2,500 people, by 2023. Intel agreed to take over the chip manufacturing plant owned by Micron in Kiryat in September 2013. Israel had originally built the Micron plant in 1993, before moving to the larger adjacent Fab28 facility, and leasing the original plant to Micron. Intel plans to retain most of Micron's 800 staff. Intel is expected to refurbish the plant to make it capable of manufacturing 10 nanometre chips, although the company will initially manufacture NOR flash memories for Micron. In 2011 the government offered Intel an ILS1bn grant to build a major new plant, and it has been reported that the government may provide a grant of ILS300-400mn for the upgrade of the Micron plant. Source: BMI © Business Monitor International Page 53 Israel Information Technology Report Q2 2015 Local Companies Table: Amdocs Address 8 Hapnina St Ra'anana 43000 Company History Amdocs was founded in Israel in 1982 as an offshoot of Golden Pages, the business phone directory company. After acquisition by SouthWestern Bell Corporation in 1985 the centre of gravity shifted to the US, but Amdocs maintains development facilities in Israel. It listed on the New York Stock Exchange in 1998 and by 2013 was the market leader in telecommunication billing services, with more than 20,000 employees and services customers in over 50 countries. Services And Products Amdocs provides software and IT services for communications, media and entertainment providers. Its major products - which it develops, implements and manages - include business support systems such as billing, CRM and operations support. It also provides network control products and managed services. In Israel, Amdocs operations centre on the AT&T Foundry innovation centre (one of three globally), opened in 2011, which Amdocs runs in collaboration with AT&T. AT&T development tracks include mHealth, HTML5, co-location services and application programming interfaces. Amdocs also provides managed services to Israeli operator Cellcom and provides support for VAS launches for Pelephone. In December 2014 Amdocs launched a mobile financial services (MFS) product. The platform was developed by MFS specialist company Utiba, which Amdocs acquired in March 2014. The service enables the provision of secure money transfers, bill payments, m-commerce, savings, loans and insurance. In October 2014 Amdocs launched several new products, including a Network Cloud Service Orchestrator, which is a vendor-agnostic solution to activate complex services with virtual network functions (VNFs) from multiple vendors within days, a comparative short time frame. Company Developments ■ ■ ■ ■ ■ Amdocs reported revenues of USD3.564bn for its fiscal year ended September 2014, up 6.5% from USD3.346bn in 2013. Net income also increased by 2.4% to USD422mn. During Q314, Amdocs announced contracts with the State Bank of India for mobile financial services, with Liberty Global for its MVNO solution, a network optimisation contract with Vodafone Hutchison Australia, a second wireline transformation project contract with Telefónica Argentina and a customer management contract with VimpelCom's Beeline. In July 2014 Cellcom Israel awarded Amdocs a contract to upgrade its customer relationship management operations. Cellcom has been an Amdocs customer for more than 10 years. In April 2014 Amdocs announced the extension of its contract with US-based carrier Sprint and an upgraded contract for its Convergent Charging and Billing solution with Far EastTone Telecommunications in Taiwan. In March 2013 Amdocs and SingTel announced the opening of their joint development centre in Israel. The SingTel L!feLabs@Israel is targeting the local community of entrepreneurs and developers as a driver of innovation at group level. In 2012 Amdocs expanded into the Latin American market by opening a Centre For Development and Operations in Brazil. Source: BMI © Business Monitor International Page 54 Israel Information Technology Report Q2 2015 Table: Check Point Address 5 Ha'Solelim Street Tel Aviv 67897 Israel Company History Check Point was founded in 1993, and by 2013 had around 2,900 employees worldwide. It has headquarters in Tel Aviv, Israel, and San Carlos in California. Check Point developed one of the first firewall products, and was named firewall market leader in 1996. Its patented Stateful Inspection Technology, on which its first firewall product was built, continues to be the foundation for network security technology in 2013. Check Point was also one the first companies to develop Virtual Private Network (VPN) products. Services And Products Check Point provides software and combined software and hardware for IT security. The fields in which it operates include network, endpoint, virtualisation, mobile and data security, as well as security management services. Its primary products are enterprise network security, which are deployed on x-86 hardware made by Crossbeam and Hewlett-Packard. Its products are secured with 35 US patents, and a further 19 pending US patents. Check Point products are sold to large enterprises and SMEs, with 100% of Global 100 companies and 98% of Global 500 companies among its customers. In October 2014 the company launched Check Point Capsule, which is a complete mobile security solution. The solution offers multi-layered security though secure access to work, which separates personal and business data on mobile devices, safe business documents, enabling authorised users to access a protected document from any device, and protection from threats everywhere, across iOS, Android, Windows and MacOS systems. Company Developments ■ ■ ■ ■ ■ In December 2014, Check Point announced that it had cracked the codes of DirCrypt, a widespread type of ransomware. This will enable individuals and organisations to recover access to blocked files without having to pay a ransom to cyber criminals. In November 2014, Check Point announced that next generation network solutions company ECI Telecom's new cyber security solutions rely on technology developed by Check Point. In October 2014, Check Point's security solutions were extended into Microsoft Azure Marketplace. Check Point reported total revenue of USD370mn for the quarter ended September 2014, up 8% compared to the same period of 2013. Non-GAAP net income reached USD177mn compared to USD169mn in Q313. In March 2014 Check Point announced a partnership with VMware to make its private cloud security protection solutions interoperable with VMware infrastructure. Check Point again received favourable ratings in Gartner's Magic Quadrant series in 2013. It was positioned in the leaders quadrant for enterprise network firewall for the sixteenth consecutive year, mobile data protection for the seventh consecutive year and unified threat management for the third consecutive year. Source: BMI © Business Monitor International Page 55 Israel Information Technology Report Q2 2015 Table: Imperva Address 125 Menachem Begin Street Tel-Aviv 67010 Israel Company History Imperva was founded in 2002 with offices in Israel and the US. By 2013 it had over 550 employees with customers across 75 countries including 337 members of the Global 2000 companies and over 250 government agencies and departments. It is growing rapidly by focusing on data centre security. Imperva reports that 94% of compromised data involved servers, but security spending has not traditionally addressed the data centre. Its target is to capture growth as enterprises move more of their security spending to their data centres. Imperva launched an IPO on NASDAQ in 2011, raising USD90mn. Imperva's software was used by more than 2,600 customers in over 75 countries in 2013, including global telecoms operators, US banks and government agencies. Services And Products Imperva develops software and services for the protection of databases and enterprise applications by focusing on data centre security. It sells products including data security, monitoring and web application security globally. In April 2013 Imperva released its latest data centre security product SecureSphere 10.0 which uses the crowd-sourced ThreatRadar Reputation service. Its main verticals include the public sector, healthcare, energy, financial services, insurance, retail and e-commerce. In October 2014 Imperva launched new security hardware products SecureSphere X8510 and SecureSphere X10K, which bring an additional layer of security to physical and virtual data centres and have throughput speeds of 5Gbps and 10Gbps, respectively. It also launched pay-as-you-go pricing for its SecureSphere Web Application Firewall (WAF), which is available on Amazon Web Services Marketplace. In November 2014, Imperva expanded its SecureSphere enterprise security solution to include a real-time solution to protect data assets in Big Data deployments safe, while still easily accessible. SecureSphere Agent for Big Data supports two Hadoop distributions, Cloudera and Hortonworks. Company Developments ■ ■ ■ Imperva reported total revenue of USD42.7mn for Q314, up 22% y-o-y. Services revenue increased 36% and combined product and subscription revenue increased 23% y-o-y in Q314. The company however reported a GAAP net loss of USD13.6mn for the quarter, widening from its loss of USD3.8mn in the same period of 2013. In February 2014 Imperva announced the acquisition of Isreali cloud-based security firms Skyfence, for USD60mn, and Incapsula, for an undisclosed sum. The announcement also coincided with the release of Imperva's SecureSphere Web application firewall for Amazon's cloud-based web services. In March 2013 Israeli security services company Incapsula, an Imperva subsidiary, was valued at around USD950mn after proving successful among small-and medium sized businesses. Incapsula provides high-end firewalls to assess incoming traffic and identify possible bugs. Source: BMI © Business Monitor International Page 56 Israel Information Technology Report Q2 2015 Table: Retalix Address 9 Dafna Street P.O. Box 2282 Ra'anana Israel 43662 Company History Retalix was founded in 1982 and is headquartered in Ra'anana, Israel, with North American headquarters in Plano, Texas. Retalix started as a developer of point-ofsale software solutions for grocery retailers. Since the late 1990s, Retalix has expanded its solutions and services offerings to cater to a wide range of retailers, developing supply chain management solutions for large chains of department stores and supermarkets. Retalix has a customer base of approximately 70,000 stores in more than 50 countries worldwide. Between 1994 and 2013 Retalix traded on both NASDAQ and the Tel Aviv Stock Exchange. NCR Corporation, a global transaction services software provider, acquired Retalix in February 2013 through a cash purchase price of USD30 per share, implying a total value of around USD650mn. The company's shares were subsequently delisted from both stock exchanges. Services And Products Retalix's software solutions, which it develops, implements and manages, cover point-of-sale (PoS) and sales channels, and include m- and e-commerce, store management, customer and marketing solutions such as loyalty programmes, merchandising and supply chain and logistics. In 2012, Retalix worked with Microsoft to launch its latest in-store retail software, Retalix 10 Store Suite, as Software-as-a-Service (SaaS). Retalix's customers include many top international retailers, such as Tesco, Carrefour, Sainsbury's, PetroChina and BP. Company Developments ■ ■ ■ ■ In July 2014 Retalix started laying off of around 100-150 employees in its Ra'anana office, out of an estimated total employee base of 1,000. The lay-offs are reportedly linked to the cancellation of a contraction with US-based retailer Target, which was unsatisfied with Retalix software installed in its Canadian office. In January 2014 Retalix added a Customer and Marketing Suite to its Retalix 10 SaaS retail platform. In November 2012, Woolworths signed a five-year managed services agreement with Retalix. The deal covers Woolworths' 3,000 locations and 25,000 PoS in Australia and New Zealand. Retalix acquired Cornell Mayo Associates, a provider of store systems for top tier department stores, in September 2012. Cornell Mayo software solutions were deployed in 4,000 stores and its customer base included seven of the top 21 department stores in the US. Source: BMI © Business Monitor International Page 57 Israel Information Technology Report Q2 2015 Company Profile Matrix SWOT Analysis Strengths Weaknesses Opportunities ■ Global client base in more than 50 countries. ■ Working with different industries. ■ Partnerships with major international IT companies. ■ Reliance on government projects, which can waver with economic outlook. ■ Lacks scale to compete with global leaders. ■ Increased presence in the US opens avenues to higher value software development and testing deals. ■ Broad range of capabilities and expertise creates potential for larger contract deployments. ■ International outlook allows for expansion of services. Israel is emerging as an IT hub, bringing attention to local companies. ■ Developing Big Data and cyber security products, which will be in increasing demand over the coming years. Threats ■ Israel's IT Market is highly competitive, with several players. ■ Increasing competition from emerging market IT software providers and services providers as they look to move up the value chain. Company Overview Matrix is a leading IT company in Israel that develops and implements technologies, software solutions and products, as well as providing infrastructure and consulting services, outsourcing, offshoring, training and assimilation. It also represents and carries out marketing for the world's leading software vendors in Israel, including IBM, Microsoft, Oracle, RedHat, EMC, SAP, HP and Apple. © Business Monitor International Page 58 Israel Information Technology Report Q2 2015 Matrix is part of the Israeli-owned Formula Systems group, which also includes Magic Software and Sapiens. Unlike those two companies however, which focus more on their global client base, Matrix derives most of its revenues from the Israeli market. Matrix, which employs around 65,000 people, also owns a large number of subsidiaries, including information security provider 2bsecure, Matrix BI (business intelligence), Matrix Global (offshore and nearshore services in Israel and Eastern Europe), Tact Software (software testing company), Tangram Soft (IT services), Exzac (US subsidiary helping financial services institutions meet regulatory compliance requirements and defend against fraud) and Xtivia (US subsidiary offering database support, data warehouse and business intelligence products). Strategy Services include implementing integration projects, developing and marketing software technologies and products for business systems, providing infrastructure and consulting services, outsourcing contracts, training and assimilation, and acting as a distributor for global leading software products, hardware solutions, and IT infrastructures. Matrix has been restructuring and launching new services in order to meet changing market conditions. In 2013, the company expanded its range of products and vendor partnerships, signed a cooperation agreement with Amazon and established a dedicated cloud computing unit called Cloudzone. In 2012 Matrix increased its focuses on information and cyber security solutions through 2BSecure, which were consolidated with solutions targeting the cyber world at Matrix including fraud and money laundering prevention and the financial regulation of EXZAC. Financial Results For the first nine months of 2014, Matrix reported total revenues of ILS1.51bn, up 7.9% compared to revenues of ILS1.4 in 9M13. Growth was primarily driven by its core software solutions and services segment, where revenues increased 11% year-on-year (y-o-y) in Q314 and accounted for 74% of total revenue. Although marketing of software products remains nearly its smallest business segment, it was the fastest growing one, as revenues rose 35% y-o-y to ILS37.2mn in Q314, with an 80% rise in operating income. Revenues from integration and computer infrastructures also increased 4.5% to ILS62.1mn in Q314, while the training and embedding segment's revenues contracted slightly to ILS34.6mn. Matrix attributed its improved performance to increased volume of activity and greater operational efficiencies in its core IT software and services and marketing segments. During the year ended in December 2013, Matrix reported revenues of ILS1.932bn (USD555mn), down 2.7% y-o-y, and net profit of ILS89.1mn (USD25.6mn), down 1.7% y-o-y. However, revenues and net profits for Q413 both increased compared to the same period of 2012. In its 9M13 results, Matrix reported that weak revenues and profits were due to seasonal effects and the timing of Jewish holidays. For 2013, Matrix © Business Monitor International Page 59 Israel Information Technology Report Q2 2015 further reported that the software services sector accounted for 72.4% of revenues, up around 2pps from 2012. The marketing of software products segment accounted for 10.7% of revenues, while integration and computer structure accounted for 4.2%, and the training and deployment sector, 6.6% of revenues. Company Developments In its results presentation for the period ended June 2014, Matrix revealed key contracts which drove growth during the quarter. They included setting up and managing a business process outsourcing (BPO) project for a government ministry, valued at tens of millions of shekels, as well as setting up a banking system for the Bank of Israel, also worth tens of millions of shekels. In April 2014, Matrix announced that it had opened a new training centre in Nanjing, China, which will offer services to more than 500 Chinese IT firms. The centre will build its business in China, where it has already trained more than 8,000 IT professionals at its Development Center for Mobile Apps, launched in Changzhou in 2013. In 2013 Matrix continued to secure contracts in the financial, security, technology and public sectors. High profile contract wins included a service-orientated architecture (SOA) project for the Israeli Defense Forces (IDF) and a five-year inspection tender for the Social Security Institute. In H112 results, Matrix announced it had acquired USbased company Exzac, which specialises in risk management and regulation in the finance sector. The new acquisition offers clients in 'leading financial institutions' in the US and Israel. Matrix also acquired Netwise, which offers solutions for the digital world and management of effective, continuous, and valuable customer experience. In 2011, Matrix won projects in several areas. In the financial market Matrix deals included a loan system for a leading bank, core financial system in the field of taxes for a leading financial institution, and operation sites for two banking institutions in Israel and abroad, among others. Matrix also completed warehousing projects for large industrial companies and won significant bids for training and deployment projects for the Ministry of Finance and the police. In 2010, Matrix reported growth in revenue and profits thanks to momentum in key sectors and services. The company won new projects in the public sector and the insurance sector, with mobile/cellular projects a growth area. Telecoms was another growth vertical in summer 2010. Major projects included a new interface and integration for a high-tech organisation, a core financial system in the field of taxation for a leading bank and a multi-channel project for a pharmaceutical company. Despite the challenging economic climate of 2008 and 2009, Matrix reported continuing successes in key sectors including healthcare, financial services, defence and government. Among tender wins in the Israeli market were a project to implement a core system in three hospitals, a software and hardware upgrade for a leading credit card company and a large-scale testing project for a government organisation. In 2008, Matrix reported tender wins in sectors including defence, communication and industrial, © Business Monitor International Page 60 Israel Information Technology Report Q2 2015 including an ILS20mn project to implement a CRM system at long-time customer Bezeq, as well as a number of public sector CRM projects. Financial Data ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ Company Details ■ ■ Revenues (2011): ILS1.758bn Revenues (2012): ILS1.984bn Revenues (2013): ILS1.932bn Revenues (Q114): ILS512.2mn Revenues (Q214): ILS485.7mn Revenues (Q314): ILS512.1mn Net Profit (2011): ILS93.4mn Net Profit (2012): ILS90.7mn Net Profit (2013): ILS89.1mn Net Profit (Q114): ILS22.3mn Net Profit (Q214): ILS17.3mn Net Profit (Q314): ILS22.1mn Matrix 3 Abba Eban Boulevard PO Box 2062 Herzlia Pituach 46120 Israel ■ Tel: +972/(0) 9 959 8840 ■ Fax: (0) 9 959 8844 ■ www.matrix.co.il © Business Monitor International Page 61 Israel Information Technology Report Q2 2015 Ness SWOT Analysis Strengths Weaknesses ■ Acquisition by Hilan Tech will see new investment into operations. ■ Large international presence and wide client base. ■ Several technology centres in India, one of the fastest growing IT markets. ■ Acquisition by private equity rather than a technology company in 2010 limited access to scale and expertise in the IT field. Opportunities ■ Slow revenue growth. ■ Acquisition by Hilan Tech will allow greater focus on core businesses and core domestic market of Israel. ■ Major deals with banks and governments provide growth. ■ Acquisition of Imano offers strong potential for moving into the mobile app segment. ■ Onshore presence in the US opens doors to high value mobility and analytics software development opportunities for corporates. Threats ■ Israel's IT market is competitive, with several players. ■ Software development and offshoring are areas of intensifying competition, as vendors in emerging markets attempt to move up the value chain. Company Overview Ness Technologies is an Israeli company and global provider of end-to-end IT services and solutions. The company was founded in 1999. On June 10 2011, Ness announced it would be acquired by an affiliate of Citi Venture Capital International (CVCI) in an allcash transaction valued at approximately USD307mn. Ness announced on October 11 2011 that the acquisition was finalised. The company subsequently delisted and ceased trading on the Nasdaq Global Select Market and the Tel Aviv Stock Exchange. Since the acquisition, Ness has rarely publicised new contract wins or made announcements relating to the progress on existing contracts. In June 2014 Israeli IT firm Hilan announced that it had acquired Ness Israel, a subsidiary of Ness Technologies, for USD42mn. Ness specialises in outsourcing, © Business Monitor International Page 62 Israel Information Technology Report Q2 2015 systems integration and application development, software and consulting as well as quality assurance and training. Ness Technologies is divided into four main businesses: Ness Software Engineering Services (SES), Ness Central & Eastern Europe, Ness TSG, which offers IT services for defence and security, and Ness Israel. Ness Israel has around 2,700 employees and more than 500 clients. Its head office is in Tel Aviv and it has four more branches in Israel's Advanced Technologies Park, BeerSheva, Lod and Jerusalem. The company provides business service management (BSM) solutions include capabilities for system development and integration, analytics and business intelligence, expertise in SAP, remote development centres, testing and training. Strategy Prior to Hilan's acquisition of Ness Israel, the company's plans included a focus on improving margins in its Israeli business and reducing non-core staff, with the aim of creating profitability at the company. Having already divested stakes in non-core operations such as in Asia Pacific and Europe, the company's operations are more focused. The acquisition of Imano in 2012 show's Ness' ability to respond to global trends, increasing its ability to cater to mobile device growth and the demand for products that work on wireless devices. As well as expanding its presence in mobility and analytics, Ness is also opening new offices to offer a range of onshore, nearshore and offshore services. Financial Results Following its acquisition by CVCI, Ness stopped reporting separate financial results. These data are provided for reference only. The company has not reported annual or quarterly revenue since 2011, but is widely reported in Israeli media to be struggling financially. Ness reported revenue of USD141mn in Q211, with just 1% annualised growth. This was up 3% from Q111. Revenue from the Israeli market accounted for 42% of the total, and Ness reported that demand in its market was solid across key verticals such as industrial, government, financial services and defence. Improved results in 2010 followed a 17% decline in full-year 2009 revenue compared with 2008, although around one third of this was due to foreign currency effects. Annual revenues for 2009 were reported at USD547mn. Israel accounted for around 42% of Ness' revenue. Among major developments in H111 was a USD75mn five-year agreement that Ness signed with global finance leader Barclays Capital to develop a high-tech research and development centre in Israel. The outsourced software engineering model was hailed by Ness as pioneering. The company's top 20 customers accounted for only 37% of the company's Q211 revenue, with the largest customer accounting for about 5%. © Business Monitor International Page 63 Israel Information Technology Report Q2 2015 Company Developments In June 2014, Hilan, an Israeli firm which specialises in human resource management services, announced that it had acquired Ness Israel from CVCI for USD42mn. Hilan stated that the net sale would be for USD32mn, in order to create working capital of USD10mn for Ness Israel, which has reportedly struggled over the last several years. When the deal closes, Ness Israel CEO Shachar Efal will acquire 10% of the company. Although Ness Israel does not dominate the country's IT market as much as it once did, it will still offer a major boost to Hilan's position in the market and range of capabilities. Ness Israel's turnover reportedly reached around ILS700mn in 2013, compared to Hilan's revenue of ILS430mn. Meanwhile, Ness Israel has a total workforce of 2,700, compared to Hilan's employee base of around 500. In March 2014, Ness became the first unionised high-tech company in Israel. More than a third of the company's employees joined the Histadrut labour federation, in an attempt to protect their interests against company downsizing. In March 2013 Ness Technologies announced the opening of a new development centre in Pittsburgh in the US. The launch of the Pittsburgh Development Centre is part of Ness' strategy of building a strong onshore presence to compliment its offshore and nearshore development centres in India, Eastern Europe, Singapore and Israel. The Pittsburgh centre will specialise in mobility and business analytics, as well as providing a full spectrum of engineering services. The location was selected to provide proximity to US corporate locations, for better collaboration and flexibility of resources, as well as being close to major universities for hiring purposes. In December 2012, Ness announced its intended acquisition of UK-based Imano, a company that specialises in mobile strategy, design and development. The deal is aimed at improving Ness' ability to meet the mobility demand of its customers. Imano designs web applications and created mobile apps for a number of major brands in the UK. 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 US and will remain subject to the rules and regulations of NASDAQ and the US Securities and Exchange Commission. Ness hoped the dual listing would increase its visibility and status in the Israeli market, with almost a third of the company's business aimed at Israeli customers or delivered by an Israeli workforce. The listing came despite a series of disappointing quarterly results in 2009, which added up to a 17% decline in revenue compared with the previous year. 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. © Business Monitor International Page 64 Israel Information Technology Report Q2 2015 Contracts In August 2012 Ness announced a 10-year contract with the Israeli Ministry of Finance to create a new national long term savings and insurance exchange. So important is the project to Ness that the company established a dedicated subsidiary called SwiftNess to develop and operate the National Exchange, including a service and support centre. The new exchange is expected to streamline work processes and provide the public with information about the retirement savings and insurance plans on offer. The first phase of the project was scheduled to begin offering funds transfers and information transmission to insurance brokers and banks in Q213. Later developments will allow individuals and enterprises to access information in the exchange. In January 2011, Ness' software engineering unit became a partner for Pegasus Solutions. The two companies established an extended software development centre in Mumbai. Ness' Software Product Engineering division continued to be a strong performer in Q111, with a major boost from the software engineering outsourcing contract signed with Barclays Capital. In the same quarter, Ness' Commercial and Civilian business unit reported 4% annualised organic growth, with the biggest win being the USD17mn contract with Israel Electric Corporation. The Defence and Homeland Security unit was described as slightly behind plan with revenue, but reported strong operating margins, boosted by a big deal with the Israel Ministry of Defence. In Q111 one big win reported by Ness in the Israeli market in H111 was a USD17mn deal with Israel Electric Corporation, for which Ness implemented a range of SAP solutions and provide support over a five-year period. Other successes included a USD10mn deal with the Israel Ministry of Defence and a USD5mn deal with Derech Eretz, the operator of the TransIsrael toll road. In September 2010, Ness won a USD3.7mn, five-year contract from Israel's Meitav Regional Water and Sewage Corporation to provide development, improvement and maintenance services for the company's SAP-based ERP and billing system. The contract also included an optional three-year extension, valued at USD2.2mn. The company continued to be strong in the financial services sector, with a USD1.1mn contract win in October 2010 from Israel Direct Insurance (IDI) to implement a companywide, SAP-based ERP system. The new system will comprise financial, logistics and HR modules. Financial Data ■ ■ ■ Company Details ■ ■ Revenues (Global, 2010): USD571.8mn Revenues (Global, Q111): USD137.3mn Revenues (Global, Q211): USD141.3mn Ness Israel Ness Tower Atidim Industrial Park © Business Monitor International Page 65 Israel Information Technology Report Q2 2015 P O Box 58152 Tel Aviv 61580 Israel ■ Tel: +972/3 766 6800 ■ Fax: 3 766 6809 ■ www.ness.com © Business Monitor International Page 66 Israel Information Technology Report Q2 2015 Hilan SWOT Analysis Strengths Weaknesses ■ Steady growth in revenues and market capitalisation throughout 2009-2013. ■ Strong foothold in its core area of expertise: human resource management. ■ Revenues declined y-o-y in Q114 and Q214. ■ Operations solely focused on Israel, meaning that it is highly sensitive to any slowdown in Israel's economy and the impact it would have on IT spending. Opportunities ■ Exposed to the high-growth cloud computing and IT security markets though subsidiary We! ■ Opportunity to turn around recently acquired Ness Israel's business by re-focusing on the local market, where there remains considerable growth potential. ■ Israel's vibrant startup and SME market continues to grow and generate new customers for Hilan's core human resource management software. ■ Rapidly growing economies and demand for IT solutions across the MENA region offers opportunity for regional expansion. Threats ■ Consolidating operations with Ness Israel, which is doubles Hilan's size and has underperformed in recent years, could prove challenging. ■ Increasing investment from global IT firms in Israel is intensifying competition in Israel's IT market. Company Overview Hilan is a Software-as-a-Service (SaaS) company that offers comprehensive solutions for managing human capital. Its software and services cover payroll, human resources, presence and pensions, and helps companies manage the lifecycle of employees from recruitment to retirement. The company was first founded in 1968 and staged an initial public offering (IPO) on the Tel Aviv Stock Exchange in 1993. The largest shareholder is DCL Technologies, with a 47.5% stake, followed by Migdal Group with a 12.2% stake. At the end of 2013 Hilan had 1,187 employees. © Business Monitor International Page 67 Israel Information Technology Report Q2 2015 Hilan's core solutions and products are divided into four categories: Hilan Pension, Hilan Presence, Hilan HR and Hilan Salary. The company manages HR systems for around 1,800 companies and organisations and more than 800,000 employees across a wide range of sectors. These include the high-tech, banking and finance, colleges and universities, communications, healthcare, transportation, retail, education, hospitality and public sectors. Hilan also offers IT infrastructure solutions and business intelligence through its subsidiaries We! and Qlik View Israel. We! This is a branch of Hilan specialising in IT infrastructure, including cloud computing, virtualisation, centralised storage, disaster recovery, Big Data and data and communication security. We! is divided into three main business segments: System Infrastructure, Information Security and Cloud Computing. We! has business partnerships with Cisco, VMware, NetApp, IBM, ArcSight, VerdaSys, Microsoft and Citrix. Qlik View Israel This branch of the company specialises in business intelligence and business detection. Qlik software interacts with customers' existing SAP, Microsoft, SQL, Oracle and Salesforce systems, combining information from all different sources into a user friendly platform. Customers can then use Qlik's associate capabilities to draw links and highlight patterns between the different data and, finally, manipulate them into easy to understand charts, graphs, lists, etc. Qlik has tailored its software for several key sectors, including financial services, marketing, manufacturing and infrastructure, telecoms, pharmaceutical and medical and the public sector. © Business Monitor International Page 68 Israel Information Technology Report Q2 2015 Steady Growth Hilan Share Price, 2009-2014 (ILS) Source: Bloomberg Strategy With a very strong presence in its core field of human resource management, Hilan has been expanding its capabilities through acquisitions. It ramped up this strategy in June 2014, when it announced the acquisition of Ness Israel, the Israel-focused segment of global IT firm Ness, for USD42mn. Hilan stated that the net sale would be for USD32mn, in order to create working capital of USD10mn for Ness Israel, which has reportedly struggled over the last several years. Hilan completed the acquisition of Ness Israel on November 10 2014, acquiring the entire company except for the security unit and pension clearing operations. Hilan now holds 99% of the capital of Ness Israel. The latter's CEO Shahar Ef'al owns the remaining 1% of the company, with the option of purchasing an additional 8.99% back from Hilan. The acquisition will drastically increase Hilan's share of Israel's IT market and its range of services. Ness specialises in outsourcing, systems integration and application development, software and consulting as well as quality assurance and training. It will also more than double the size of the company; Ness Israel's employee base is estimated at around 2,700 and its turnover reportedly reached around ILS700mn in 2013, compared to Hilan's revenue of ILS430mn. © Business Monitor International Page 69 Israel Information Technology Report Q2 2015 Table: Hilan Financial KPIs, 2008-2014 2008 2009 2010 2011 2012 2013 H114 220.9 225.3 259.5 361.4 390.5 420.4 200.3 10.2 80.4 99.5 199.9 215.1 236.1 99 127.8 134.1 147.4 161.5 175.4 184.3 101.2 o/w Business Information Services 82.9 10.8 12.6 - EBITDA 58.4 57.6 67.6 72.8 78.8 79.6 39 EBITDA Margin (%) 26.4 25.6 26.1 20.2 20.2 18.9 19.4 Net Income Before XO 23.5 37.8 40.4 40.3 45.4 48.5 23.7 Total Revenues o/w Software Sales o/w Human Resource Services - - - Note: XO = extraordinary items. Source: Hilan, Bloomberg Company Details ■ ■ Hilan Hilan House 12 Hamasgar Street Tel Aviv Address line 4 67776 Israel ■ 972-03-638-3333 ■ http://www.hilan.co.il/ © Business Monitor International Page 70 Israel Information Technology Report Q2 2015 Regional Overview BMI View: The IT markets in the Middle East and Africa are among the least developed globally, with the notable exception of Israel, but this has begun to change in recent years as markets across the region move to a higher growth trajectory. BMI attributes this to a range of factors including stronger and more stable economic growth, attempts at economic diversification in the major oil producing states, the declining cost of IT products and solutions globally, improved international connectivity following investment in submarine cables, investment by global IT vendors and a general strengthening of IT policy environments. However, despite significant progress the region continues to lag far behind the developed markets of North America, Western Europe and North East Asia, as well as much of emerging Asia. This presents both challenges and opportunities for vendors. There is scope for rapid growth as countries can leapfrog legacy technologies and enter a period of rapid catch-up growth, but there is also a deficit in terms of telecoms infrastructure, while piracy rates remain stubbornly high. An Emerging But Heterogeneous Region The Middle East and Africa contains a mix of emerging and frontier markets, as well as some high-income oil rich states and Israel, with the latter only behind the US in terms of its position on the technological frontier. This was underlined in H214 when Israel's finance and economy ministries approved US-based semiconductor chip manufacturer Intel's USD6bn investment plan for upgrading its manufacturing plant in the southern Israeli town of Kiryat Gat. Israel also has a vibrant start-up ecosystem and is a leading source of solutions in the rapidly growing cybersecurity market. As a result of market maturity, growth rates will be slow in Israel in a regional perspective, but BMI identifies specific opportunities. For instance the cybersecurity market in the Middle East will be an outperforming segment due to the recent history of politically motivated incidents and the continued tensions in the region. Local and international companies are already positioning themselves to take advantage of this opportunity by investing in efforts to develop new solutions. In July 2014 Microsoft and cloud services provider Akamai launched a cybersecurity-focused start-up accelerator programme in Israel, in partnership with venture capital firm Jerusalem Venture Partners. In June of that year Israeli security analytics company Fortscale announced that it raised USD10mn in funding from Intel Capital and Blumberg Capital to expand its R&D programme. In the same month cybersecurity startup Hexadite announced a USD2.5mn in seed funding for its operations. © Business Monitor International Page 71 Israel Information Technology Report Q2 2015 Israel is the leading market in the region in terms of adoption and technological innovation, but emerging and frontier markets will have the greatest growth opportunities. Nigeria, South Africa and Egypt are forecast to record the strongest medium-term growth in IT spending, with market size and investment in supporting data network infrastructure crucial factors in our view of outperformance. Qatar stands out as the outperforming oil rich state in our outlook. Spending there will be boosted by aggressive modernisation and infrastructure development. The underperforming markets in the region are expected to be the oil rich and slow reforming Middle Eastern markets, including Saudi Arabia, Kuwait, Oman, Bahrain and Lebanon. High Growth Region Offers Major Opportunities Middle East And Africa - IT Market Growth Outlook Bubble size represents market size in USD in 2014. Source: BMI One market that stands out for progress on improving its ICT policy framework is Egypt. BMI believes will provide a foundation for medium-term outperformance. The government has planned three national projects to boost the ICT sector. Around EGP45bn (USD6.4bn) has been allocated for the first project, which involves improving access to high speed internet services. Phase one and two of the first project are expected to be completed by 2017 and 2020. About EGP30bn (USD4.27bn) has been set aside for the © Business Monitor International Page 72 Israel Information Technology Report Q2 2015 second project, which involves the development of infrastructure for the high speed internet project by 2020. The government plans to allocate around EGP9bn (USD1.28bn) to the third project, which is expected to improve access to communications devices for Egyptians. The government is also promoting the software development industry. Government policy is helping by providing investment incentives attached to training commitments by international vendors. Global Giants Targeting The Frontier BMI expects vendors that tailor their strategies to the fundamental characteristics of markets in the region will outperform, particularly those with coherent strategies for frontier markets in Africa. A wide range of global vendors have targeted the region in recent years, but they will also face competition from emerging market players and local telecoms operators. We believe the broad commitments made by Microsoft, IBM, SAP, Cisco and Huawei will put them in a strong position. All five have made major progress in expanding local presence, adapting their service portfolios and partnering local players, but here we focus on the most significant developments in H214, from SAP, IBM and Microsoft. SAP has been operating in Africa for 22 years, with a client base of around 1,300 across the continent. It is firmly established in South Africa but in H214 announced plans to strengthen its foothold in other key markets in the region through a new regional growth strategy. According to the new strategy, SAP Africa, the Johannesburg-based subsidiary of SAP SE, will take responsibility for all SAP operations across 51 African countries, including Morocco, Algeria, Tunisia and Mauritania. As part of the USD500mn investment plan, SAP will train around 10,000 consultants across the region, in partnership with government ICT agencies and universities, over the next seven years. Table: Sap Africa's Growth Pillars, August 2014 i. Accelerate industry growth in energy and natural resources, utilities, public sector, financial services and telecoms in the core countries of South Africa, Nigeria, Kenya, Angola and Morocco. ii. Promote innovation by promoting the roll-out of core SAP technology to address local resource challenges. iii. Enhance SME growth by selecting Kenya as the next market for the Emerging Entrepreneur Initiative, due to the country's potential to grow and support a thriving entrepreneurial ecosystem. iv. Build foundational growth and skills development with the launch of additional Skills for Africa Scholarship Programme in South Africa, Kenya, Nigeria and Angola to create an open-business ecosystem of SAP-qualified consultants to execute various projects. Source: SAP, BMI © Business Monitor International Page 73 Israel Information Technology Report Q2 2015 SAP is following hot on the heels of global IT services leader IBM, which BMI believes has the most comprehensive and expansive regional strategy for Africa. It is aiming to increase revenue in the region from around USD400mn in 2012 to USD1bn by 2015. IBM established its regional headquarters in Kenya in 2011 and has established a multi-million dollar commercial research lab in the country to develop locally-relevant solutions for key industries across Africa. The company now has more than 20 subsidiaries on the continent, a move that is already paying off with numerous major contract wins, including more than 20 banking deals, throughout the region in the last five years. IBM has also taken a leading position in Nigeria, one of the markets we expect to outperform over the next five years, with IBM reporting that 80% of Nigeria's banks run on its enterprise server architecture. Microsoft has a relatively broad regional presence through its dominance of the PC market, as well as through social responsibility initiatives and start-up support, but in recent years has shown greater commitment to the African enterprise market. It has been promoting its cloud computing Azure platform, with a particular focus on South Africa, which is emerging as a leading regional cloud market and has the potential to become a hub for Sub-Saharan Africa. Prioritising cloud services over on-site deployments is a logical move in Africa, where legacy infrastructure is scarce and cloud cost structures are considered favourably. Local business surveys put the cloud adoption rate for medium to large enterprises in South Africa at around 50% in 2014. BMI believes there is also an opportunity among small businesses, especially those with no experience of legacy on-site infrastructure. © Business Monitor International Page 74 Israel Information Technology Report Q2 2015 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is essential to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail the population pyramid for 2015, the change in the structure of the population between 2015 and 2050 and the total population between 1990 and 2050. The tables show indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split and life expectancy. Population (1990-2050) 15 10 5 2050f 2045f 2040f 2035f 2030f 2025f 2020f 2015f 2010 2005 2000 1990 0 Israel - Population, mn f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Page 75 Israel Information Technology Report Q2 2015 Israel Population Pyramid 2015 (LHS) & 2015 Versus 2050 (RHS) Source: World Bank, UN, BMI Table: Population Headline Indicators (Israel 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f 4,499 6,013 6,603 7,420 7,919 8,507 9,071 na 2.1 2.1 2.0 1.2 1.4 1.2 Population, total, male, '000 2,245 2,963 3,258 3,664 3,927 4,229 4,518 Population, total, female, '000 2,253 3,050 3,345 3,755 3,992 4,278 4,552 Population ratio, male/female 1.00 0.97 0.97 0.98 0.98 0.99 0.99 Population, total, '000 Population, % y-o-y na = not available; f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Page 76 Israel Information Technology Report Q2 2015 Table: Key Population Ratios (Israel 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f 2,693 3,721 4,102 4,624 4,841 5,149 5,531 59.9 61.9 62.1 62.3 61.1 60.5 61.0 1,805 2,291 2,501 2,795 3,078 3,357 3,539 67.0 61.6 61.0 60.4 63.6 65.2 64.0 1,406 1,689 1,839 2,021 2,217 2,314 2,327 Youth population, % of total working age 52.2 45.4 44.8 43.7 45.8 44.9 42.1 Pensionable population, '000 399 602 662 774 860 1,043 1,212 Pensionable population, % of total working age 14.8 16.2 16.1 16.7 17.8 20.3 21.9 Active population, total, '000 Active population, % of total population Dependent population, total, '000 Dependent ratio, % of total working age Youth population, total, '000 f = BMI forecast. Source: World Bank, UN, BMI Table: Urban/Rural Population & Life Expectancy (Israel 1990-2025) 1990 2000 2005 2010e 2015f 2020f 2025f 4,065.4 5,484.7 6,043.6 6,813.6 7,295.9 7,863.1 8,411.5 90.4 91.2 91.5 91.8 92.1 92.4 92.7 433.8 529.0 560.1 606.8 623.6 644.2 659.6 9.6 8.8 8.5 8.2 7.9 7.6 7.3 Life expectancy at birth, male, years 74.6 76.9 78.1 79.3 80.3 81.0 81.7 Life expectancy at birth, female, years 78.3 80.9 82.2 83.1 83.8 84.5 85.2 Life expectancy at birth, average, years 76.4 79.0 80.2 81.3 82.1 82.8 83.5 Urban population, '000 Urban population, % of total Rural population, '000 Rural population, % of total f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Page 77 Israel Information Technology Report Q2 2015 Table: Population By Age Group (Israel 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, total, '000 482 614 666 735 792 767 767 Population, 5-9 yrs, total, '000 461 547 619 666 754 792 767 Population, 10-14 yrs, total, '000 461 527 553 619 670 754 792 Population, 15-19 yrs, total, '000 429 527 535 564 613 671 755 Population, 20-24 yrs, total, '000 355 513 538 555 564 615 673 Population, 25-29 yrs, total, '000 328 463 522 556 555 566 616 Population, 30-34 yrs, total, '000 314 391 469 546 534 557 568 Population, 35-39 yrs, total, '000 324 370 396 499 529 537 560 Population, 40-44 yrs, total, '000 271 358 375 423 500 531 539 Population, 45-49 yrs, total, '000 188 371 362 390 415 500 530 Population, 50-54 yrs, total, '000 170 315 372 371 387 413 497 Population, 55-59 yrs, total, '000 159 214 315 387 376 384 410 Population, 60-64 yrs, total, '000 150 194 212 328 364 370 379 Population, 65-69 yrs, total, '000 135 184 188 216 269 351 358 Population, 70-74 yrs, total, '000 97 160 169 182 192 252 330 Population, 75-79 yrs, total, '000 87 126 137 160 165 172 227 Population, 80-84 yrs, total, '000 50 73 96 119 115 135 142 Population, 85-89 yrs, total, '000 20 42 46 66 77 79 95 Population, 90-94 yrs, total, '000 6 13 19 21 32 39 42 Population, 95-99 yrs, total, '000 0 2 3 5 6 10 13 Population, 100+ yrs, total, '000 0 0 0 0 0 1 2 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Page 78 Israel Information Technology Report Q2 2015 Table: Population By Age Group % (Israel 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, % total 10.73 10.21 10.09 9.91 10.01 9.03 8.46 Population, 5-9 yrs, % total 10.26 9.11 9.38 8.98 9.53 9.31 8.46 Population, 10-14 yrs, % total 10.27 8.77 8.39 8.35 8.47 8.87 8.73 Population, 15-19 yrs, % total 9.55 8.78 8.12 7.61 7.74 7.89 8.33 Population, 20-24 yrs, % total 7.90 8.55 8.15 7.49 7.13 7.23 7.42 Population, 25-29 yrs, % total 7.29 7.70 7.92 7.50 7.01 6.66 6.80 Population, 30-34 yrs, % total 7.00 6.51 7.12 7.36 6.74 6.56 6.27 Population, 35-39 yrs, % total 7.22 6.16 6.01 6.74 6.68 6.32 6.18 Population, 40-44 yrs, % total 6.03 5.96 5.68 5.71 6.33 6.25 5.94 Population, 45-49 yrs, % total 4.19 6.17 5.49 5.26 5.25 5.88 5.85 Population, 50-54 yrs, % total 3.80 5.25 5.65 5.01 4.90 4.86 5.49 Population, 55-59 yrs, % total 3.55 3.57 4.77 5.22 4.75 4.53 4.52 Population, 60-64 yrs, % total 3.34 3.24 3.22 4.43 4.60 4.35 4.18 Population, 65-69 yrs, % total 3.02 3.06 2.85 2.92 3.40 4.13 3.95 Population, 70-74 yrs, % total 2.17 2.67 2.57 2.47 2.43 2.97 3.65 Population, 75-79 yrs, % total 1.94 2.11 2.09 2.16 2.09 2.03 2.51 Population, 80-84 yrs, % total 1.13 1.22 1.47 1.61 1.46 1.59 1.57 Population, 85-89 yrs, % total 0.46 0.71 0.70 0.89 0.97 0.94 1.05 Population, 90-94 yrs, % total 0.14 0.22 0.29 0.29 0.41 0.46 0.46 Population, 95-99 yrs, % total 0.02 0.03 0.05 0.07 0.08 0.12 0.15 Population, 100+ yrs, % total 0.00 0.00 0.00 0.01 0.01 0.01 0.02 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Page 79 Israel Information Technology Report Q2 2015 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. Common to our analysis of every industry is the use of vector autoregressions. They allow us to forecast a variable using more than its own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. We mainly use OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account; ■ Testing the directional movement and magnitude of coefficients; ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); ■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity;. © Business Monitor International Page 80 Israel Information Technology Report Q2 2015 BMI uses the selected best model to perform forecasting. Human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Sector-Specific Methodology A number of criteria drive our forecasts for each IT variable. IT forecasting is complicated due to the fragmented nature of the market, with little transparency of vendor data and low apparent agreement between many sets of figures in terms of market definition, base and methodology. In addition, forecasts are affected by consideration of a variety of internal and external political and economic factors. Within best-practice techniques of time-series modelling, our quarterly updated forecasts are improved substantially by intimate knowledge of the prevailing features of each local market. Individual variables taken into account in creating each forecast include: ■ Overall economic context, and GDP and demographic trends; ■ Underlying 'information society' trends; ■ Projected GDP share of industry; ■ Maturity of market structure; ■ Regulatory developments and government policies; ■ Developments in key client sectors such as telecommunications, banking and e-government; ■ Technological developments and diffusion rates; ■ Exogenous events. Estimates are calculated using our own macroeconomic and demographic forecasts. Sources Additional sources used in IT reports include national ministries and ICT regulatory bodies, national industry associations, and international industry organisations such as the International Telecommunication © Business Monitor International Page 81 Israel Information Technology Report Q2 2015 Union (ITU), officially released company results and figures, and international and national industry news agencies. Risk/Reward Index Methodology BMI's Risk/Reward Index (RRI) provide a comparative regional ranking system evaluating the ease of doing business and the industry-specific opportunities and limitations for potential investors in a given market. The RRI system divides into two distinct areas: Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. This is further broken down into two sub categories: ■ Industry Rewards (an industry-specific category taking into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors). • Country Rewards (a country-specific category, factoring in favourable political and economic conditions for the industry). Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period. This is broken down into two sub categories: ■ Industry Risks (an industry-specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry and the relative maturity of a market). • Country Risks (a country-specific category in which political and economic instability, unfavourable legislation and a poor overall business environment are evaluated to provide an overall score). We take a weighted average, combining industry and country risks, or industry and country rewards. These two results in turn provide an overall Risk/Reward Score, which is used to create our regional ranking system for the risks and rewards of involvement in a specific industry in a particular country. For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall Risk/Reward Score a weighted average of the total score. As most of the countries and territories evaluated are considered by BMI to be 'emerging markets', our score is revised on a quarterly basis. This ensures the score draws on the latest information and data across our broad range of sources, and the expertise of our analysts. © Business Monitor International Page 82 Israel Information Technology Report Q2 2015 Sector-Specific Methodology In constructing these indices, the following indicators have been used. Almost all indicators are objectively based. Table: It Risk/Reward Index Indicators Rationale Rewards Industry IT market value, US$bn Denotes breadth of IT market. Large markets score higher than smaller ones. Sector value growth, % year-on-year (y-o-y) Denotes sector dynamism. Scores based on annual average growth over five-year forecast period. Government initiatives and spending Denotes spending boost provided by public sector, which can be a crucial determinant of sector development. Hardware, % of total sales Denotes maturity of market. A high proportion of hardware sales, compared to services/ software, indicates that the overall IT market is immature. Country Urban-rural split Urbanisation is used as a proxy for development. Mainly rural states score lower. GDP per capita, USD A high GDP per capita supports long-term industry prospects. Overall score for Country Rewards is also affected by the coverage of the power transmission network across the state. Risks Industry Intellectual property (IP) laws Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting. ICT policy Subjective evaluation of official policy towards IT development, as enshrined in statute and tax code. Country Short-term external risk Score from BMI's Country Risk Index (CRI). It evaluates the vulnerability to external shock, which is the principal cause of economic crises. Such a crisis would cut investment. Short-term financial risk Score from CRI, to denote risk of currency crisis and stability of banking sector. The former would hit revenues in hard currency, while the latter would curtail investment funding. Trade bureaucracy Score from CRI to denote ease of trading with the state. Legal framework Score from CRI denotes the strength of legal institutions in each state - security of investment can be a key risk in some emerging markets. Bureaucracy Score from CRI denotes ease of conducting business in the state. Corruption Score from CRI denotes the risk of additional illegal costs/possibility of opacity in tendering/ business operations affecting companies' ability to compete. Source: BMI © Business Monitor International Page 83 Israel Information Technology Report Q2 2015 Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-components equal weight. The following weighting has been adopted: Table: Weighting Of Components Component Rewards Weighting, % 70, of which - Industry 65 - Country 35 Risks to 30, of which - Industry 40 - Country 60 Source: BMI © Business Monitor International Page 84 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... market's overall growth Given Israel' s rich tech skills resource base, many organisations prefer to conduct software development in-house © Business Monitor International Page 14 Israel Information Technology Report Q2 2015 2015 Outlook We project real GDP growth of 3.1% in Israel in 2015, an improvement on a slight economic downturn in 2013 BMI's Country Risk team downgraded Israel' s growth forecast slightly... of 3.1% in 2015, from our previous forecast of 3.3% © Business Monitor International Page 21 Israel Information Technology Report Q2 2015 Low Base Effects Key To Rebound In 2015 Israel - GDP 500 8 400 6 300 4 200 2 100 Nominal GDP, USDbn (LHS) 2019f 2018f 2017f 2016f 2015f 2014f 2013 2012 2011 2010 0 2009 0 Real GDP growth, % y-o-y (RHS) f = BMI forecast Source: Central Bureau of Statistics Israel, BMI... International Page 24 Israel Information Technology Report Q2 2015 Investment in the Israeli technology segment will contribute to capital formation growth in 2015 On November 11, 2014, US-based software firm Microsoft purchased Israeli security solutions provider Aorato, which develops security solutions to identify suspicious activity in company's networks, for approximately USD200mn Israel' s highly educated... trading conditions, vendors have reported a continued flow of IT projects, with large tenders from the Israeli ministries of finance and defence and the Bank of Israel In December 2013 VMware won a data centre contract from the Israel Defence Forces valued at USD27mn in the local media © Business Monitor International Page 15 Israel Information Technology Report Q2 2015 Industry Trends - IT Market... Monitor International Page 22 Israel Information Technology Report Q2 2015 Government Unable To Rein In Deficit Israel - Government Revenues & Expenditure 500 -3 400 -3.5 300 -4 200 -4.5 100 0 -5 2009 2010 2011 2012 2013 Fiscal revenue, ILSbn (LHS) Budget balance, % of GDP (RHS) 2014f 2015f 2016f 2017f 2018f Fiscal expenditure, ILSbn (LHS) e/f = BMI estimate/forecast Source: Israeli Ministry of Finance,... for 29.2% of Israel' s IT market by 2019, up from 25.1% in 2013, while services are forecast to rise from 35.4% of the IT market to 37.2% over the same timeframe © Business Monitor International Page 18 Israel Information Technology Report Q2 2015 Wireline Table: Telecoms Sector - Wireline - Historical Data & Forecasts (Israel 2011-2018) 2011 Main telephone lines in service, '000 2013e 2014f 2015f 2016f... browsing traffic in Israel in December 2014, up 7.7pp from 8.2% a year earlier By comparison, Mac OSX's share of browsing traffic increased by 2.2pp, to 5.1% over the same period © Business Monitor International Page 35 Israel Information Technology Report Q2 2015 Israel PC Browsing Traffic By OS (%) And y-o-y Change (pp) December 2014 Source: Statcounter Vendor Performance The Israeli PC market has... in 2015, and to grow by 4.5% on average over the next five years Promising Investment Opportunities Israel - LNG Sector 30 6 4 20 2 10 0 0 -2 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f Dry natural gas production, bcm (LHS) Dry natural gas net exports, USDbn (RHS) f= BMI forecast Source: IEA, BMI © Business Monitor International Page 25 Israel Information Technology Report Q2. .. 26 Israel Information Technology Report Q2 2015 forecast period, when we expect large-scale gas exports to begin and investment in the energy industry to pick up We forecast real GDP growth averaging 3.5% over the 2015- 19 period Risks to our five-year outlook are tilted to the downside, much the result of elevated risks to political stability We do not expect a long-lasting peace agreement between Israel. .. Page 30 Israel Information Technology Report Q2 2015 long-term licenses in the market, which should enable these operators to plan current and future investments with more clarity But any upside will be dependent on a strong improvement in the security situation Table: MENA Q21 5 RISK/REWARD INDEX Industry Rewards Country Rewards Industry Risk Country Risk Telecoms Rating Rank Previous Rank Israel 42.5