... any information hereto contained Israel Information Technology Report Q4 2012 © Business Monitor International Ltd Page Israel Information Technology Report Q4 2012 CONTENTS Executive Summary... Business Monitor International Ltd Page Israel Information Technology Report Q4 2012 Executive Summary BMI View: Israeli IT spending is expected to reach US$6.0bn in 2012, up 5% In Q112, several indicators... military conflict between Israel and the Islamic republic could erupt in the coming years © Business Monitor International Ltd Page Israel Information Technology Report Q4 2012 Israel Economic SWOT
Q4 2012 www.businessmonitor.com ISraeL information technology Report INCLUDES BMI'S FORECASTS ISSN 1752-4245 Published by Business Monitor International Ltd. ISRAEL INFORMATION TECHNOLOGY REPORT Q4 2012 INCLUDES 5-YEAR FORECASTS TO 2016 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: October 2012 Business Monitor International 85 Queen Victoria Street London EC4V 4AB UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2012 Business Monitor International. All rights reserved. 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Israel Information Technology Report Q4 2012 © Business Monitor International Ltd Page 2 Israel Information Technology Report Q4 2012 CONTENTS Executive Summary ......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................. 7 Israeli IT Sector SWOT .......................................................................................................................................................................................... 7 Israel Telecommunications Sector SWOT .............................................................................................................................................................. 8 Israel Political SWOT ............................................................................................................................................................................................ 9 Israel Economic SWOT ........................................................................................................................................................................................ 10 Israel Business Environment SWOT .................................................................................................................................................................... 11 MEA IT Risk/Reward Ratings ........................................................................................................................ 12 Table: Middle East And Africa IT Risk/Reward Ratings Table, Q412 ................................................................................................................. 14 MEA IT Markets Overview.............................................................................................................................. 15 IT Penetration ...................................................................................................................................................................................................... 15 Sectors And Verticals ........................................................................................................................................................................................... 18 Market Overview ............................................................................................................................................. 22 Government Authority............................................................................................................................................................................................... 22 Table: Government Initiatives ............................................................................................................................................................................. 23 Hardware .................................................................................................................................................................................................................. 23 Software .................................................................................................................................................................................................................... 25 Services ..................................................................................................................................................................................................................... 27 Outsourcing ......................................................................................................................................................................................................... 28 Industry Developments ........................................................................................................................................................................................ 28 Industry Forecast ........................................................................................................................................... 31 Table: Israel IT Sector – Historical Data & Forecasts (US$mn Unless Otherwise Stated), 2009-2016 .............................................................. 33 Industry Forecast Internet ............................................................................................................................. 34 Table: Internet Data And Forecasts, 2009-2016.................................................................................................................................................. 34 Macroeconomic Forecast .............................................................................................................................. 36 Table: Israel – Economic Activity, 2011-2016 ..................................................................................................................................................... 38 Competitive Landscape ................................................................................................................................. 39 Internet Competitive Landscape .......................................................................................................................................................................... 42 Company Profiles ........................................................................................................................................... 44 Ness ..................................................................................................................................................................................................................... 44 IBM ...................................................................................................................................................................................................................... 47 Hewlett-Packard .................................................................................................................................................................................................. 52 Matrix .................................................................................................................................................................................................................. 58 Microsoft Corporation ......................................................................................................................................................................................... 61 Country Snapshot .......................................................................................................................................... 66 Table: Israel's Population By Age Group, 1990-2020 ('000) ............................................................................................................................... 67 Table: Israel's Population By Age Group, 1990-2020 (% of total) ...................................................................................................................... 67 Table: Israel's Key Population Ratios, 1990-2020............................................................................................................................................... 68 Table: Israel's Rural And Urban Population, 1990-2020 .................................................................................................................................... 68 BMI Methodology ........................................................................................................................................... 69 How We Generate Our Industry Forecasts .......................................................................................................................................................... 69 IT Industry ........................................................................................................................................................................................................... 69 © Business Monitor International Ltd Page 3 Israel Information Technology Report Q4 2012 IT Ratings – Methodology .................................................................................................................................................................................... 70 Table: IT Business Environment Indicators ......................................................................................................................................................... 71 Weighting............................................................................................................................................................................................................. 72 Table: Weighting Of Components ........................................................................................................................................................................ 72 Sources ................................................................................................................................................................................................................ 72 © Business Monitor International Ltd Page 4 Israel Information Technology Report Q4 2012 Executive Summary BMI View: Israeli IT spending is expected to reach US$6.0bn in 2012, up 5%. In Q112, several indicators suggested moderating consumer demand, but vendors still reported a solid trading environment for IT services across industrial, government, defence and financial services segments. The current rate of PC penetration, while high for the region, represents potential for organic growth. Household penetration is estimated at around 75%. The Israeli IT market should gain enough momentum from key sectors to expand at a CAGR of 7% over BMI's 2012-2016 forecast period, due to momentum from key segments. Headline Expenditure Projections Computer Hardware Sales: US$2.5bn in 2011 to US$2.6bn in 2012, +3% in US dollar terms. Forecast in US dollar terms downwardly revised due to macroeconomic factors, but Israeli businesses are investing more to facilitate expansion and development. Software Sales: US$1.3bn in 2011 to US$1.3bn in 2012, +6% in US dollar terms. Forecast in US dollar terms downwardly revised due to analyst modification, but device and data proliferation will drive spending on customer relationship management (CRM), databases and business intelligence. IT Services Sales: US$2.0bn in 2011 to US$2.1bn in 2012, +6% in US dollar terms. Forecast in US dollar terms downwardly revised due to analyst modification but key segments such as government and defence will be a continued source of opportunities. Risk/Reward Ratings: Israel's IT rating score was 66.3 out of 100.0, up on the previous quarter. Israel has regained first place in our latest RRR table, ahead of both Qatar and the UAE. Key Trends & Developments. BMI forecasts overall solid growth for the Israeli IT market for 2012, despite a deteriorating external economic environment. Businesses will maintain a cautious attitude to IT investments due to uncertainty about a sustainable global economic recovery in key export markets. There should, however, be growth in areas such as business intelligence, server virtualisation, mobile devices and cloud computing. New cloud computing offerings and increased competition in this segment should fuel further demand from users. Particular areas of opportunity for cloud computing include banking and retailing as organisations in those fields look to save money on hardware investments. Businesses will, not only seek to make cost savings, but will look to boost efficiency and increase flexibility of response to customer needs. © Business Monitor International Ltd Page 5 Israel Information Technology Report Q4 2012 The growing emphasis of many multinational IT vendors on software and services revenues, has led companies like Dell and SAP to direct more investment in R&D at the Israeli market. However Israel's domestic IT service companies have strong advantages owing to local knowledge and contacts. For example, Ness Israel's long-term relationship with the Israeli Department of Defence makes it a strong player in the defence and homeland security vertical. Despite their global ambitions, Israel remains an important market for these companies and typically accounts for 40-50% of revenue. © Business Monitor International Ltd Page 6 Israel Information Technology Report Q4 2012 SWOT Analysis Israeli IT Sector SWOT Strengths Weaknesses Opportunities Threats One of the most modern economies in the region, with a highly educated, linguistically skilled workforce, and relatively low labour costs compared with most developed countries. Strong defence and government spending provides base for IT demand. Relatively mature IT market, with services accounting for an estimated 33% of spending in 2009. Despite this, the market for basic IT hardware and software is far from saturated. Strong political support, with the government having implemented many policies to aid in the development, success and expansion of the IT sector. The recession at the beginning of the 2000s created a client mentality of focusing on the bottom line, with enhanced services and customer market power adding to pressure on pricing and margins. Digital divide, with 3% of bottom-income group having home internet access. Despite the financial crisis, the financial services sector, which accounts for around 15% of spending, will have to spend on compliance with Basel II and other international standards, driving growth. Defence and government projects should be less sensitive to the economic downturn. Outsourcing, Software-as-a-Service (SaaS) and applications management likely to grow fastest out of IT services, with particular opportunities in financial sector. Opportunities for partnership/investment in Israel's lively local IT company sector. Healthcare IT will be a growing source of opportunity. Economic downturn and unemployment will lead to weaker consumer and business sentiment. 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 Ltd Page 7 Israel Information Technology Report Q4 2012 Israel Telecommunications Sector SWOT Strengths Well-developed internet/broadband sector compared with regional peers. Liberal mobile market consisting of four operators. Mature market with strong take-up of value-added and 3G services. Weaknesses Mobile penetration rate of over 120% means growth in the mobile market has slowed considerably and operators must look for alternative revenue sources. Lack of competition in all telecoms sectors. Regulator has been slow to license new services, such as WiMAX wireless broadband. Voice over Internet Protocol (VoIP) licensing and triple-play for Bezeq placed on hold, which could hinder prospects. Opportunities Threats Emergence of rival operator HOT Telecom, made up of the main three cable operators (Golden Channels, Matav and Tevel) to compete against Bezeq, could provide cheaper services. Introduction of number portability and the entry of mobile virtual network operators (MVNOs) to the mobile sector could shake up competition and drive down retail prices for consumers. Continued interconnection tariff reduction could have a devastating effect on operators' revenue. Operators, Bezeq in particular, have resisted the introduction of number portability, which could lead to a price war and drive down mobile revenue. Operators are also hostile to the introduction of MVNOs. © Business Monitor International Ltd Page 8 Israel Information Technology Report Q4 2012 Israel Political SWOT Strengths Weaknesses 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. The protracted conflict with the Palestinians means there are persistent security risks, although violence in the West Bank has been reduced significantly. Strategies to minimise or end the conflict are domestically divisive. Frequent change to the composition of the coalition government often leads to policies becoming fragmented or significantly diluted. The fallout between Turkey and Israel, caused by the Gaza flotilla incident of May 2010, has meant that Israel has lost a key Middle East ally. Opportunities A warming of relations with Greece has given Israel the ability to engage in military exercises over a larger geographic area. Threats The victory of Hamas in the 2006 Palestinian elections, its subsequent takeover of the Gaza Strip and Israel's military incursion into the territory in December 2008/January 2009 have added to uncertainty. Finding a lasting solution poses a dilemma for Israel, which has previously said it will not talk to the militant organisation. The construction of the West Bank barrier and the continued home-building in some West Bank settlements antagonises the Palestinians and stands in the way of the peace process. Iranian President Mahmoud Ahmadinejad's refusal to give up his country's nuclear programme raises concerns that an open military conflict between Israel and the Islamic republic could erupt in the coming years. © Business Monitor International Ltd Page 9 Israel Information Technology Report Q4 2012 Israel Economic SWOT Strengths Weaknesses Opportunities Threats The policy framework has stabilised in recent years, and recent austerity measures will help to keep the fiscal deficit under control. The workforce is highly educated and skilled. The country's close ties with the US provide it with substantial financial assistance for economic and military ends. The main downside risk to the economy is the security situation. A sharp deterioration can have an immediate impact on domestic confidence, tourism receipts, the exchange rate and foreign investment. The economy is highly exposed to that of the US, in terms of exports and investment. In the long term, high levels of employment will underpin 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. Israel's energy supplies are not stable at the moment – the Egypt-Israel gas pipeline has been targeted frequently in 2011, forcing the country to buy more expensive fuels from alternative sources. Competition from emerging Chinese and Indian producers of high-tech goods and polished diamonds, as well as sluggish growth in the eurozone, could undermine demand for Israeli exports. © Business Monitor International Ltd Page 10 Israel Information Technology Report Q4 2012 Israel Business Environment SWOT Strengths The business environment is supported by sound infrastructure and communication networks, as well as transparent legislation. The banking system is one of the most sophisticated in the region, and offers a wide range of both consumer and commercial credit products. Weaknesses Historic political instability increases the risk premium of investment in Israel. Some limits on repatriation of capital exist and there are constraints on foreign investment in the high-tech sector. Opportunities Corporate tax rates, at 25%, have not increased markedly as a result of social protests in 2011. The Qualified Industrial Zone agreements with Jordan and Egypt boost the potential for trade. Threats Strike action has proved extremely disruptive to the business environment over the past two years. The parliament approved a plan to increase the country's oil and gas royalties, which could reduce energy profits in the future. © Business Monitor International Ltd Page 11 Israel Information Technology Report Q4 2012 MEA IT Risk/Reward Ratings There is just one change in the ranking of countries in our Q412 IT Risk/Reward Ratings (RRR) table for Middle East and Africa (MEA), despite changes in the aggregate scores of most countries in this quarter's update. The average overall score fell by 0.2pts to 51.1, driven by declines in the industry rewards, market risks and country risks categories. The average score in the country rewards category remained unchanged at 72.3, although there were changes in some countries' individual scores. BMI estimates the total value of the IT markets in our coverage was US$35.2bn in 2011. We forecast it to grow to US$37bn in 2012 to just over US$56.5bn by 2016. Notable growth drivers for IT services in the MEA include governments' economy diversification efforts and the increasing integration of IT services with other industry verticals. In the consumer segment, rising income levels and improvement in literacy rates are also potential growth drivers. The key risks to outlook are mainly political and economic as they have a significant impact on the disposition of individuals and businesses to purchase high-value IT products and services. Our ratings reflect our assessment of key growth drivers and risks to outlook in the IT markets of the 11 countries in our regional coverage. Israel remains at the top of our South Africa In The Lead RRR table although its IT Market Values (US$bn), 2011 aggregate score falls slightly from 66.5 in the previous quarter to 66.3 this quarter. Israel's country rewards and country risks scores decreased this quarter due to a slowdown in the economy because of concerns in the eurozone and the US, but this was offset by an upgrade to its industry risks rating to reflect an improvement in its IP protection policies. Israel has one of the most developed IT markets in the region, reflected Source: BMI by household computer penetration of more than 75% and significant government and military expenditure on IT projects. Israel's well-educated population, strong policies for IP protection, stable political environment and developed telecoms infrastructure also make it an attractive location for global IT players to site key R&D and production facilities. © Business Monitor International Ltd Page 12 Israel Information Technology Report Q4 2012 The UAE reclaims second position from Qatar following an increase in its aggregate score and a decrease in Qatar's. This was the only change to our RRR table this quarter. The UAE's score was boosted by an upgrade to its country risks score, which increased from 67 in the previous quarter to 68.3 this quarter. The UAE's country risks rating is the highest in the region and reflects our positive outlook for economic growth, supported by strong performances in non-oil sectors such as tourism and trade industries. By contrast, we downgraded Qatar's country risks score this quarter to reflect the gradual increase in Qatar's risk profile as a result of its increasing regional clout and considerable influence on the changing political dynamic in the region. That aside, Qatar remains a regional outperformer in terms of economic growth and political stability – two key factors that make it an attractive destination for IT investments in the region. Kuwait, along with Qatar, is the only other country with a rating of 100 in the country rewards category, a situation that demonstrates relatively high GDP per capita, high public sector wages and, consequently, strong private consumption and lower unemployment rates. The Kuwaiti government and major businesses are huge buyers of IT services. In February 2012, US-based technology firm Booz Allen Hamilton entered Kuwait to provide specialist services to government and commercial clients. However, Kuwait's small population means there is limited growth opportunities in the consumer segment. Saudi Arabia and Turkey, in fifth and sixth positions respectively, saw increases to their aggregate score this quarter but this did not affect their rakings on our table this quarter. Saudi Arabia's score increased 0.7pts to 52.2 following an upgrade to its country rewards rating, while Turkey's overall score benefited from an upgrade to its country risks rating. Saudi Arabia's country structure is benefiting from increased government spending and rising oil revenues. For its part, Turkey is highly vulnerable to economic woes in Europe and the political crisis in the Middle East. However, a strong economic base has resulted in the upward revision of its GDP growth forecast for 2012 from 1.8% to 3%. Bahrain and Oman have the two lowest industry rewards scores in the region, which reflect the size of their domestic markets. We forecast robust growth in Bahrain and Oman's IT markets over the next five years as a result of significant investments in next generation telecoms infrastructure, but small population sizes and less aggressive government IT policies will make them less attractive IT investment destinations compared to other GCC states. South Africa and Egypt have the largest populations among the 11 countries in our MEA IT coverage but are underperformers, sitting in ninth and 11th (last) positions respectively on our RRR table. Both countries are held back by relatively low GDP per capita values, making them score considerably below average in the country rewards category. South Africa is further held back by a low industry risks score, which reflects its weak IP protection policies and lack of a clear ICT policy. Egypt also scores below average in the industry risks category for similar reasons, although the country's volatile political environment and precarious economic outlook present the biggest downside risk to growth. © Business Monitor International Ltd Page 13 Israel Information Technology Report Q4 2012 Lebanon remains in 10th position but risks moving back into last position if the political and economic environments in Egypt improve over the next few months. Lebanon has the lowest score in the region in both the country risks and industry risks categories, two factors that significantly reduce its attractiveness to investors despite its advantages in the form of a youthful and relatively educated population as well as attractive geographical location that could make it a regional hub. Table: Middle East And Africa IT Risk/Reward Ratings Table, Q412 Country Industry Country Rewards Rewards Rewards Industry Risks Country Risks IT Risk/Rew ard Regional Previous Risks Rating Ranking Ranking Israel 51.0 95.0 66.4 65.0 67.0 66.2 66.3 1 1 UAE 40.7 90.0 57.9 60.0 68.3 65.0 60.1 2 3 Qatar 38.1 100.0 59.8 50.0 65.7 59.4 59.7 3 2 Kuwait 33.1 100.0 56.5 40.0 66.0 55.6 56.3 4 4 Saudi Arabia 35.6 75.0 49.4 45.0 67.7 58.6 52.2 5 5 Turkey 49.5 55.0 51.4 45.0 46.4 45.9 49.8 6 6 Bahrain 26.3 75.0 43.3 57.5 61.8 60.1 48.3 7 7 Oman 27.5 70.0 42.4 50.0 60.5 56.3 46.6 8 8 South Africa 44.9 45.0 44.9 35.0 58.7 49.2 46.2 9 9 Lebanon 30.7 65.0 42.7 20.0 41.5 32.9 39.8 10 10 Egypt 37.5 25.0 33.1 40.0 50.6 46.4 37.1 11 11 Average 37.7 72.3 49.8 46.1 59.5 54.1 51.1 Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60%. The 'Rewards' rating evaluates the size and growth potential of a telecoms market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns. Source: BMI © Business Monitor International Ltd Page 14 Israel Information In Technology Report Q4 2012 MEA IT Markets Over erview IT Penetration The Middle East region divide ides into two groups in terms of information ion society development. In the first group oup are richer Internet Penetrat ation Per 100 Populati ation and more technologically adva dvanced countries, such as Israel and the th UAE, where internet penetration iss relatively r high and many households have hav access to broadband services. In moree eemerging markets such as Egypt, on the he other hand, computers remain a luxury for many. Across the MEA region, the number n of internet users is expected to grow gr significantly. South Africa is pprojected to f = forecast. Source: BMI advance the most in percentag tage terms, with penetration rising from about ab 16.3% in 2012 to 24.1% by 2016 (note: figures ma may vary elsewhere in report due to updated forecasts asts after time of writing). Egypt, where the second bigges est increase is forecast, will have 55.4% pene enetration by 2016, up from 40.1% in 2012. The UAE iss oone of the most eready states in the region, with ith internet penetration seen as reaching 78.1% within the forecast period. Growth in the number of inter ternet subscribers is also forecast to pick up in Saudi Arab rabia, with a 21% increase between 2012 and 2016. 20 Similar contrasts are apparent nt in relation to broadband penetration, where mobile broa roadband is now a major driver of overall penetra tration, due to 3G mobile service roll-outs across the regio gion, and a proliferation of mobile connec ectivity devices such as smartphones and tablets. Broadba dband penetration, which currently ranges from 5.8% 5 in Kuwait to 41.4% in Saudi Arabia. Government initiatives are afoot afo in most places, ranging from wireless broadband in Dubai D to plans to deploy fibre-optic cables exten tensively in countries such as Kuwait. BMI's broadband d penetration p forecasts have been downgraded in man any markets as a result of the economic downturn, with Saudi S Arabia's 55.5% penetration see as the highest st in i 2016. Israel is projected to reach 28%, ahead of Qata atar with 26.6%, the second and third highest respe pectively among the countries covered by BMI. Internet and broadband penetr etration growth will receive boosts from continued efforts rts to liberalise regional telecoms markets. Moves Mo towards telecoms market liberalisation have contin tinued in Qatar, Egypt, © Business Monitor International Ltd Page 15 Israel Information In Technology Report Q4 2012 Saudi Arabia and other countr ntries. Broadband penetration has become a driver of PC C ownership o in some segments, due to the growing g variety of multimedia and communication services avai vailable. There is also considerable PC C market growth potential as the current ent level of computerisation is estimated d at a less than Broadband Penetra tration Per 100 Populati ation 50% in every country in the region. re PC penetration in Egypt is estimat ated at around 10% and is forecast to rise to above 20% by 2016. In Saudi di Arabia, PC penetration is currently above ve 25% and should increase to around one ne-third by 2016. Even in Israel, where ho household penetration is estimated at abo bove 75%, there is potential for further growth. gr Government initiatives will drive dr more f = Forecast. Source: BMI use of computers in education on. In 2011, the Egyptian government anno nounced a new school building programme worth EGP15 150bn, which should provide opportunities for IT suppliers. su Around 25% of Egypt's schools are not equipp pped with computers. In the UAE, the Ministry of Education E is leading an initiative to supply computers to state schools. Meanwhile, the South African an Department of Education has announced a target of rolling rol out laptops to all school children in the coun untry by 2014. Governments in the region hav have also allocated significant budgets for e-governmentt development. d The Qatari government has outline ined plans to invest QAR6bn (US$1.6bn) in information n technology te and IT services as part of its ICT-201 015 strategy. The Kuwaiti government plans to spend US$ S$104.3bn over the next four years, in an attempt pt to t diversify the economy away from oil and boost the pprivate sector. Egypt aims to make 200 government ent services available soon online through a new e-governm rnment portal. Meanwhile, Qatar's e-governm nment programme and Hukoomi e-services portal will continue con to drive investment in computer hardw dware across government agencies and client organisation ions. South Africa's IFMS (Integrated Financial M Management Systems) project manages the evolution off ggovernment IT systems to support interoperab rability and e-government service development. Another key policy priority th throughout the region is to increase utilisation of IT by businesses bu and in particular small and medium-ssized enterprises (SMEs). One of the Saudi government nt policies that vendors are capitalising on is the t United Instalment Scheme (USI) finance option, wh which makes highquality notebooks available to SMEs. Qatar's ICT governing body, ictQatar, has made ade increasing SME © Business Monitor International Ltd Page 16 Israel Information In Technology Report Q4 2012 utilisation of IT a key policy y objective. o However, access to credit remains a barrier fo for smaller companies in Egypt and elsewhere. Drivers are increasing econom omic diversification and strong spen pending from non-oil sectors such as govern ernment, Market Size As % Of Nationall GDP G finance and enterprise. By 201 016, this should be more evident, with th IIT's share of GDP rising in many countri tries. In Saudi Arabia, for example, governmentgo driven investments in transpor ortation, property constructions and wa water and power plants will drive opport ortunities for IT vendors. An expected recovery in popu pulation growth underpins our IT mark arket growth f = forecast. Source: BMI projections for markets such h aas the UAE and Kuwait, which saw an exo exodus of expat workers in 2009. In particular, strong posi ositive population growth gives Saudi Arabia an advantage, with growth expected to reach 10% by thee eend of our five-year forecast period. Across much of the MEA regi egion, youthful population demographics and rising PC pe penetration will drive growth. An evolving retail landscape lan will also help to stimulate sales, with the traditio itional domination of smaller stores having been diluted dilu by the appearance of multi-brand electronics sectio tions in hypermarkets and mono-brand stores in mall alls. In many Middle Eastern states tes, the hydrocarbon sector remains a key one for IT spend ending. Expected increases in oil output and pric rices should provide support for higher IT budgets in this is vertical. Regional sector giants such as Saudi Aramco A and Kuwaiti leader KNPC are investing in IT to enhance operational efficiency, optimise cost struc uctures and boost overall business agility. The banking sector will also o remain re a major user of technology as banks and other fin financial services organisations look to becomee more efficient and launch new services. Telecoms is another an growth area for technology spending, as service se providers look to exploit the potential for increase ased revenue generation from new services es by implementing tools that facilitate more personalised ed offers to customers. In the wake of the political unrest un that swept the Arab world in the first half of 2011, 1, ggovernment spending is expected to help p address a economic concerns that may have underpinned d dissatisfaction d in some cases. To help maintain in social stability, the Saudi government has announced US$93bn U in handouts, © Business Monitor International Ltd Page 17 Israel Information In Technology Report Q4 2012 including wage increases, whi hich should boost consumer spending on electronic items ms such as PCs. However, a further deterioratio ation of political stability in countries such as Egypt could uld potentially cause disruptions to distribution netw etworks and have an impact on outsourcing operations. The highest growing IT marke rket in the IT Market Compound d Growth MEA IT market over the forec recast period 2012-2016 (%) %) is expected to be Egypt, with th compound c growth of 89% for 2012-2016 16. There is room for considerable growth th in the country in the next few years, rs, given the current low level of computeri terisation, which is much higher in the business bu sector than in the populationn aat large. BMI highlights strong growth th for GCC countries, including Qatar (47 47%), where the decision to award Qatar the th 2022 FIFA World Cup is expected d to t fuel a wave of investment in IT prod roducts and Source: BMI services. Government spendin ing, investment and private consum umption growth are all expected to trend upwards in 2012 12, as Qatari real GDP growth reaches a projected 28.6% 28 in US dollar terms. Other high-growth opportunitie ities are forecast to include the UAE (72%) and S South Africa (66%). Sectors And Verticals Hardware will continue to dom ominate MEA IT spending as the number of personal com omputer users rises steadily over the forecast perio riod. This will be driven by growing affordability, govern ernment initiatives and the popularity of notebooks.. T There could be a boost from computer hardware tenders rs delayed as a result of the economic situation. Sales of notebooks are growin ing roughly twice as fast as desktops in many markets. In 2011, Saudi retailers reported a surge in de demand mobile PCs, in many cases fuelled by price cuts. ts. PC sales were stronger than previously expec pected, although this growth was driven in part by promot otional price cutting. The notebook sector was thee m main factor driving retail segment growth across the reg egion in 2011 as consumer sales felt the benefit efits of aggressive channel promotions. Notebooks are exp xpected to account for more than 60% of total saless over o the forecast period. However, in a few markets such uch as Egypt, desktops still account for around half of the total PC market in volume terms. © Business Monitor International Ltd Page 18 Israel Information Technology Report Q4 2012 Much of the growth of notebooks has been driven by price cuts. In 2011, average notebook costs dropped by up to 25% for some models. Many notebooks now retail in the price range of US$544 to US$680, down from an average price of around US$800 before the financial crisis. The launch of notebooks based on the Android operating system has supported this trend, as Android netbooks are often cheaper than Windows 7 ones. However, the growing popularity of tablets is expected to provide a growth area in 2012, after the product category enjoyed a surge of popularity in 2011, fuelled by Apple's iPad. Tablets will be a growth area across the region in 2012, and the devices, originally seen as primarily for consumers, are forecast to experience increasing take-up in the business segment. However, the popularity of alternative connectivity devices such as tablets and smartphones has undercut replacement sales of notebooks. Market Structure % Of Total IT Market f = forecast. Source: BMI Government programmes in Egypt and Saudi Arabia have made low-price computers available in easy instalment payment schemes. Government investment in education and e-services will mean desktop purchases for schools, colleges and government offices. Spending on software as a share of total IT spending is as low as 14% in Egypt and below 20% in a majority of MEA markets. As the regional economy improves, more investment is likely to be driven by plans for expansion, rather than merely to realise cost efficiencies. Similarly the growing regional ambitions of South African companies will be a factor driving corporate spending on software in that market, Across the region however, many businesses remain focused on costs, and software vendors will pitch efficiency gains from virtualisation and cloud computing, as companies focus on return on investment. © Business Monitor International Ltd Page 19 Israel Information Technology Report Q4 2012 2012 should, however, see a boost from systems upgrades deferred from 2009. Migrations to the Windows 7 operating system and new Intel core technology could trigger a new cycle of hardware upgrades, although much will depend on business and consumer confidence. Around half of Saudi businesses still use computers based on the Windows XP operating system. Meanwhile, about one-third of computers in the UAE are still based on the Windows XP operating system. BMI predicts plenty of room for software market growth over the forecast period as numerous untapped sectors still exist. Key verticals will include telecoms, finance, retail, healthcare and the public sector. There has been growing demand in the market for applications tailored towards particular verticals. SMEs are likely to lead spending growth, with manufacturing and trading firms seeking efficiencies by making the transition from manual environments to full automation of back-office systems. Customer relationship management (CRM) will be a growth area, and other high-growth categories are set to include business intelligence, storage and security products. The security software market is important throughout the region as increased investments in IT hardware over recent years are now driving spending on secure content management technologies. There are some challenges for the regional software market. One key issue is that of illegal software: across the region, up to 80% of software is counterfeit. Another important factor is low income, including the high costs of operating systems such as Windows, which has led to activity to promote open source in countries such as Egypt, championed by IBM and other vendors. Over BMI's five-year forecast period, software-as-a-service (SaaS) business models are expected to provide a growing opportunity for vendors, with increasing demand for industry-specific applications. Government adoption will also be a key driver in many countries, such as the UAE where cloud services are central to the emirates government's e-government strategy for the next three years. BMI predicts that demand for IT services will grow strongly during the 2012-2016 period. The regional IT services market is dominated by demand from oil and gas, government, finance and telecoms sectors, which many markets account for more than half of total spending. In markets such as Saudi Arabia, most enterprise application spending still comes from segments such as oil and gas and banks. However, more projects are expected in segments such as education and health. Currently, IT services' share of IT spending ranges from around 25% to 37% in the MEA countries covered by BMI. Support and maintenance account for around one-third of spending on IT services, but demand for more complex services has increased, with large outsourcing deals in the UAE, Israel and elsewhere. There is also demand for services such as hosting, facilities management and disaster recovery. Vendors have reported an evolution in demand for services, with a shift away from the dominance of product implementation and installation to greater interest in managed services, value-added services, © Business Monitor International Ltd Page 20 Israel Information Technology Report Q4 2012 facilities management, hosting and business continuity and disaster recovery. Even in less mature markets such as Egypt, larger customers are becoming more demanding in terms of their IT expectations. In the private and public sectors, MEA organisations are looking for help to utilise efficiencies from cloud computing services such as SaaS and infrastructure-as-a-service (IaaS). Surveys suggest that cloud spending was an IT investment priority for around one-quarter of MEA businesses in 2011. Cloud services are central to the UAE's e-government strategy for the next three years. In 2011, Kuwaiti data communications services providers such as Zajil signed agreements with partners to expand their cloudbased product offerings. Particular areas of opportunity for cloud computing include government, banking and retailing as organisations in those fields look to save money on hardware investments. Cloud computing is also becoming viable in markets such as South Africa due to improved and lowercost bandwidth availability. © Business Monitor International Ltd Page 21 Israel Information Technology Report Q4 2012 Market Overview Government Authority Government Authority Ministry of Science and Technology Minister Daniel Hershkowitz The Ministry of Science and Technology has undergone numerous name changes and received its current name following the election of Binyamin Netanyahu's government in March 2009. 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 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. 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. 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 © Business Monitor International Ltd Page 22 Israel Information Technology Report Q4 2012 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 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 – E-commerce infrastructure and service A central e-commerce service allowing citizens and companies to access a uniform interface to carry out a variety of payments and purchases, including the payment of taxes, fees, fines (VAT, vehicle and driving licence fees, traffic fines), and the purchase of tangible goods (government publications). The service processed more than ILS250mn in its first year. Lehava project Group of initiatives to help close digital divide. Hardware The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is forecast to reach US$2.6bn in 2012. The market is expected to grow at a CAGR of 6% over the forecast period to reach US$3.2bn in 2016, higher than previously forecast BMI has downwardly revised its Israeli PC hardware market forecast as of Q412, due in part to global economic headwinds. Businesses are now investing more to facilitate expansion and development, rather © Business Monitor International Ltd Page 23 Israel Information Technology Report Q4 2012 than purely to realise cost efficiencies, but there should be growth areas. However, lower average prices have meant that revenue growth in most segments has lagged shipments. As the Israeli economy's growth cools in 2012, enterprises will remain cautious about capital spending, but there could be a boost from computer hardware tenders previously delayed because of the economic situation. Migrations to Microsoft's Windows 7 operating system, and its anticipated successor Windows 8, due in late 2012, and new Intel core technology, should stimulate new cycles of hardware upgrades. Much will depend on business and consumer confidence. Israeli PC shipments recorded a strong recovery in 2010 from the effects of the economic slowdown, and the recovery continued in 2011, but a moderation is expected in 2012. Consumer spending is also expected to moderate in 2012, having been the main growth area in 2011. The current rate of PC penetration, while high for the region, represents potential for organic growth. Household penetration is estimated at around 75%. Digital divide issues mean Israel currently has 600,000 children living below the poverty line, only 3% of whom have internet or home PC access, compared with 90% in the top-income group. The Israeli government has launched various initiatives to increase computer and internet penetration, including Computer for Every Child, Window to Tomorrow's World, Tapuah (the Israeli Society for the Advancement of the Information Age) and others. The level of support, however, has been criticised by some industry insiders as too low. Meanwhile, there were signs in early 2012 of a consumer slowdown, although low unemployment and inflation, and a wage rise for public sector workers, should prevent this from being too severe. The Israeli IT market is relatively mature, but hardware still accounts for around half of the total market, excluding communications hardware. Notebooks are the fastest-growing segment of the market, although as recently as 2008 desktops still took around two-thirds of unit sales. In 2010-2011, however, the share of desktops declined precipitously, due in large part to demand for non-PC form factors such as smartphone and tablets. This trend of preference for mobility is expected to continue over the 2012-2016 forecast period. Despite its declining share of sales, however, the desktop sector is still significant, largely due to business and government end-users. Netbooks were a driver of PC market growth in 2010, but have plateaued in the face of competition from form factors. In particular, smartphones from Palm, RIM, Apple and other vendors are being offered as alternative connectivity solutions and often include a Wi-Fi option. Tablet notebooks first emerged as a significant market factor in 2010, spearheaded by Apple's iPad. In October 2010, Apple released the Hebrew-compatible version of its operating system for the tablet, which was expected to boost imports of the device to Israel. Previously Israeli users of the iPad were obliged to pay for a less than optimal Hebrew keyboard application. In August 2010, iDigital, the Israeli importer of the iPad, had announced the availability of the device for sale in Israel, but, as of October 2010, the cellular companies were still not offering the device. The Israel © Business Monitor International Ltd Page 24 Israel Information Technology Report Q4 2012 Ministry of Communications had cleared import of the Apple iPad for Israel in April, after previous concerns that iPads were in non-compliance with Israeli wireless standards. One Israeli chain was selling the iPad at a retail price of ILS3,800, or around US$1,000, about twice the price of the device in the United States. Other vendors such as Samsung with its Galaxy series have followed Apple in releasing tablet devices, which have a form factor between the size of a smartphone and a netbook. Tablets are being designed to appeal to consumers who find a smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too big or heavy. Tablets are expected to be significantly more expensive than smartphones, but, despite a previous mixed record with this form factor, are seen as a continued growth area. While tablets were initially positioned as consumer devices, there has been an increasing level of procurement from the enterprise sector. Another area vendors will watch is the e-reader market. Like iPads, Kindles are not yet readily available in Israel, but that situation is expected to change. Currently Amazon, Barnes and Noble and Apple do not permit the use of an Israeli credit card at their online bookstores. However, Amazon now offers Israeli consumers the ability to download content directly to their PC or Kindle using an Israeli credit card. Software Israeli software spending is projected at US$1.3bn in 2012, up 6% year-on-year. The packaged software segment is expected to grow at a CAGR of around 10% over the forecast period. In 2011, the pick-up in demand for systems and upgrades continued in both 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. Despite the uncertain global economic outlook for Israel's export-based economy, opportunities for software vendors continue to exist across a range of sectors from government to energy, financial services, telecoms and utilities. Large organisations investing in SAP-based systems included the Meitav Regional Water and Sewage Corporation and Israel Direct Insurance (IDI). Local IT leader Ness was among those vendors reporting a rebound in Israeli market revenue growth, with the company's annualised revenue growth increasing in each quarter. Meanwhile, the SME segment, the mainstay of the Israeli business sector, has emerged in recent years as an important growth area for enterprise systems. Spending on enterprise solutions should continue to grow steadily, with reviving or emerging areas of opportunity including security, CRM solutions and business intelligence. However, in the current economic climate, vendors will continue to pitch the efficiency gains potentially offered by these applications. Migrations to the Windows 7 operating system, and the expected launch towards the end of the year of its successor, Windows 8, should have a positive impact on 2012 sales despite business caution. More © Business Monitor International Ltd Page 25 Israel Information Technology Report Q4 2012 than 50% of Israeli computer users are estimated to still be using the Windows XP operating system, and this represents a significant potential market, as support for XP will be withdrawn by 2014. 2012 should, in any event, see a boost from systems upgrades previously deferred as a result of the impact of the economic crisis in public and private sectors. 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. CRM is a particularly buoyant area, while in 2011 vendors continued to sign up new business intelligence customers. The security software segment is an important opportunity, potentially worth tens of millions of dollars, and awareness of security issues has grown with the rise of cloud computing. Israel has also become more aware of the growing threat and sophistication of cyber attacks and has been encouraging government and private sector organisations to take action. Spending is likely to continue across all segments, with security content and threat management the current priorities. Given the current focus on many businesses of controlling costs, the pay-on-demand SaaS model has grown in popularity and spread beyond the initial core application area of CRM. The economic crisis may have provided a lasting boost to the SaaS model, particularly as broadband penetration grows. More vendors are looking for channel partners to help them offer cloud computing and rented software services to local organisations. New cloud computing offerings and increased competition in this segment should fuel further demand from users. As well as cost savings, businesses will look to boost efficiency and increase flexibility of response to customer needs. Large businesses are most likely to put IT applications such as mail, phone systems and document management into the cloud. However, enterprise applications that require a high level of customisation, or which are subject to regulatory or data-sensitivity constraints, are more likely to stay on premise. In terms of verticals, the financial sector has been a mainstay of demand, with other key areas including defence and healthcare. These three sectors are somewhat immunised against the consequences of the global slowdown. Despite the current financial crisis, regulatory compliance and demand for new services will continue to drive IT spending by banks. Vendors reported in Q110 that the key financial services segment had started to see demand recovery. Similarly, defence spending on new systems is likely to be maintained given the current security situation. Software comprises an important part of Israel's industrial production and exports, with software exports of US$3bn representing around two-thirds of the value of the entire domestic IT sector. Almost all global vendors are active in the domestic market, selling licences alongside integration and applications services. Global vendors control more than three-quarters of the market, with SAP in first place. In the past, the Israeli SME segment was dominated by local software companies. Now international players, including © Business Monitor International Ltd Page 26 Israel Information Technology Report Q4 2012 market leaders such as SAP and Oracle, are entering with appropriate software packages. Microsoft is also designing a software package for this market segment. Services The IT services segment is forecast to reach a value of US$2.1bn in 2012, and this is expected to grow at a CAGR of 8% over the forecast period to reach US$2.8bn in 2016. In 2011, vendors reported a continued flow of new projects in sectors such as government, financial services, homeland security and utilities. Key sectors such as government and financial services had driven a pick-up in growth in 2010 after demand was hit by a slowdown in 2009. In 2011, demand for IT services continued to be healthy, according to leading vendors, with new projects across public sector, industrial and financial verticals. The defence and homeland security sector was also solid. However, much will depend on confidence in the global economic recovery, particularly in key Israeli export markets. Vendors have had to adapt to an environment where some projects are commissioned more in response to immediate needs and with a focus on cost reduction. Defence and government spending represent a significant component of Israeli IT demand and have some immunity to economic vicissitudes. In 2011, the Ministry of Defense awarded a number of multimillion dollar IT contracts, including a US$10mn tender in H111 for a new command and control system. Among other smaller government projects in 2011, the Israeli Police awarded a US$6mn contract. Meanwhile, healthcare and utilities were also generating outsourcing projects in 2011, such as the award of a US$17mn deal by Israel Electric Company. The development of a natural gas sector should be one driver of opportunities in the utilities vertical. Following a recovery in 2010 from the economic slowdown, vendors reported that demand had revived in the key financial services vertical, where new projects included an US$11mn IT outsourcing tender by the First International Bank of Israel. Government agencies were also commissioning or extending IT contracts, including a US$2.6mn outsourcing contract extension awarded by Israel's Ministry of Environmental Protection. Growth is expected to reach a higher trajectory in the second half of our five-year forecast period. Key Israeli IT services spending verticals include the financial sector, where international regulatory compliance and structural and market reforms have driven substantial IT investment. The sector accounts for around 25% of total IT services spending, while the government accounts for another quarter. Along with defence, these two key sectors are likely to be a continued source of opportunity because the factors driving spending in each case are not particularly sensitive to the economic downturn. The new administration will likely feel pressure to ramp up government spending to combat lower private consumption and rising unemployment. Another key area of opportunity is healthcare IT. © Business Monitor International Ltd Page 27 Israel Information Technology Report Q4 2012 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). Particular areas of opportunity for cloud computing include banking and retailing as organisations in those fields look to save money on hardware investments. 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, SMEs have also been investing more and represent a growth opportunity. Many SMEs are waking up to the need to compete through more direct investment in support and service infrastructures. Similar factors are driving an increase in demand for managed services, with businesses reluctant to invest in internal IT capabilities, or deterred from doing so by a lack of available skills. Outsourcing Outsourcing has become a bigger factor and was forecast to account for about 20% of IT services spending, or at least US$320mn, in 2011. Key sectors for IT outsourcing include: The military, with outsourcing deals such as that awarded to HP by the Israeli Navy for management of its IT infrastructure highlighting the opportunities there. While the value of the HP deal was not made public, it is estimated to be worth several million shekels. The financial sector is another leading vertical for outsourcing. In 2006, a deal between First International Bank of Israel and EDS Israel was the largest outsourcing contract in the Israeli banking industry and a milestone at the time. Tata Consultancy Services' decision to open a local branch also underlines the potential attraction of the financial sector, now benefiting from economic recovery and greater security. The retail sector offers further opportunities, with IBM Israel having a 10-year outsourcing contract with Clubmarket Marketing Chains. The contract includes computer systems for the supermarket chain's branches and point-of-sale terminals. Although Israel seemingly possesses many advantages as an outsourcing destination (in particular a technologically literate, linguistically skilled workforce and low labour costs relative to most developed countries), the country has failed to capitalise on these strengths in the past. Aside from Israel's small size, another issue is security. However, the government is now actively promoting Israel to multinationals, and there has been a spate of call-centre construction. The work seems to be paying off, with Israel starting to emerge as a desirable location for packaged applications and localisation services. Industry Developments IT is an important element of the Israeli government's socio-economic policy framework. The National Economic Council submitted a policy agenda to the government that specified two main policy tracks to © Business Monitor International Ltd Page 28 Israel Information Technology Report Q4 2012 reduce poverty and achieve balanced growth. The first track is expected to emerge as the main priority for the government. The digital divide is both a symptom and an aggravator of relative poverty. In May 2010, the Israeli Ministry of Finance launched a programme called 'Relative Advantage' to provide a boost to Israel's high-tech sector. IT will be harnessed to the second goal of achieving balanced, long-term economic growth. Israel's software sector has long been one of the country's economic pillars and a magnet for inward investment. The Israeli Association of Electronics and Software Industries has projected that the software sector will generate US$3.2bn annually by the end of the decade. The government hoped the high-tech sector would generate US$3.0bn for the nation's economy by 2010. Offshoring Israel is working hard to ensure it benefits from the global offshoring trend, which it sees as an area of potential. Despite an often unstable political and security situation, Israel has marketed its IT skills with some success and attracted outsourcing operations from major IT corporations such as Intel, IBM and Microsoft, as well as Motorola. One factor in this, of course, has been incentives that the Israeli government started to offer back in 2006, with subsidies of up to ILS1,000 per employee per month. Several major public and private sector outsourcing deals have also highlighted the growing importance of outsourcing. However, there are fears of a skills bottleneck. In 2007, the government said Israel hoped to produce 10,000 engineers a year by 2010, up from the present graduation rate of 4,900, a small number by the standards of China, India and the US, but a big challenge for Israel. The number of jobs in the sector rose to around 61,000 in 2006, according to the government's Central Bureau of Statistics. Engineering salaries in Israel are about half those in the US but double those in India. E-Services As part of its modernisation agenda, the government is also pressing ahead with various other strands of its e-government project. Among other initiatives, there has also been spending on computers in healthcare and the nationwide paperless court initiative. The e-government programme is leading to increased demand for computers, with the Israeli government reaching a supply agreement with Dell and HP. The government chose Microsoft search technology to power its government services portal, gov.il. Meanwhile, the Israeli government was progressing with its plans to roll out smart ID card systems intended to cover the entire population. With an urgent need for the government to update technology and strengthen authentication systems, the original target was to introduce 2.5mn smart ID cards. In December 2008, HP was awarded a contract to produce 5mn ID cards; however, it is yet to receive the go-ahead from the Knesset, which is deliberating over the passing of the biometric database bill. The ID cards, set to cost Israel US$67.49mn, would use 'smart' identification methods involving fingerprints and digital photography. © Business Monitor International Ltd Page 29 Israel Information Technology Report Q4 2012 The 2005-2007 masterplan of the government's ERP project called for implementation in around 90 government units by the end of 2007. The project leveraged mySAP ERP (content delivery software) and had a focus on financial, logistics and human resource components. Dubbed Merkava, the project cost an estimated ILS800mn since its launch in 1999. Israel's Digital Divide It has been estimated that Israel currently has around 600,000 children living below the poverty line, and the Gini co-efficient has been estimated as among the highest of any Organisation for Economic Cooperation and Development (OECD) country. A 2007 survey found only 30% of children living in poverty have internet or home PC access, compared with 90% in the top-income group. Alarm at such statistics has helped to make tackling the digital divide central to the government's key policy goal of reducing poverty. There is also an ethnic dimension to digital inequalities. Recent research by the University of Haifa showed a consistent gap in internet access between the Jewish and Arab populations, with 72.5% of the former using the internet in Israel compared with 52.5% of the latter. In order to deal with the digital divide problem, the following measures have been proposed: A senior minister for the high-tech sector should be appointed to coordinate activities currently carried out by various ministries. The minister should prepare a master plan for government policy in the information industry. Regulations should be amended to facilitate rapid investments in communications, technological infrastructure, bandwidth and fast internet backbone. Massive investment should be made in the educational system for training information workers. Aid to be given to the less wealthy to make them part of Israel's information industry. © Business Monitor International Ltd Page 30 Israel Information Technology Report Q4 2012 Industry Forecast BMI projects that the Israeli IT market will grow to a value of US$6.0bn in 2012, and the market is forecast to reach US$8.1bn in 2016. In Q112, several indicators suggested moderating consumer demand, but vendors still reported a solid trading environment for IT services across industrial, government, defence and financial services segments. The Israeli IT market should gain enough momentum from key sectors to expand at a CAGR of 7% over BMI's 2012-2016 forecast period, thanks to stable demand from defence and government sectors as well as opportunities in verticals such as financial services and small and medium-sized enterprises (SMEs). 2012 Outlook Spending on IT products and services is expected to moderate in 2012. In 2011 PC sales bounced back with modest single-digit year-on-year (y-o-y) growth. However, growth momentum is expected to ease because of shifts in the global economic environment. The Israeli economy continues to cool and sluggish external demand and weaker consumer spending are likely to weigh on headline growth throughout the year. BMI forecasts overall solid growth for the Israeli IT market for 2012. With IT spending highly correlated wtih GDP growth, businesses will maintain a cautious attitude to IT investments this year. There should, however, be opportunities for vendors around business intelligence and cloud computing. Sales could receive a boost from computer purchases previously delayed as a result of the economic situation. The move to mobility and new form factors such as tablets will help to drive demand in the consumer segment, while to some extent undermining demand for traditional notebooks. Consumer spending continued to slow in Q112, after spending on durable goods such as PCs showed signs of falling off in 2011. Per capita consumption of durable goods contracted by an annualised 14.5% quarter-on-quarter in Q211. However, consumer spending should be supported by stimulatory fiscal spending as well as falling unemployment and low inflation and interest rates. Meanwhile, in 2011, vendors reported a continued pick-up in the flow of IT projects, with new large tenders from the Israeli Ministry of Defense and the Israel Electric Company. Vendors reported demand had revived in the key financial services vertical, continuing a trend established in 2010, when new projects included an US$11mn IT outsourcing tender by the First International Bank of Israel. Healthcare, the public sector and utilities were also generating new projects or significant contract extensions. Migrations to Microsoft's Windows 7 operating system, and its eagerly-anticipated successor Windows 8, could trigger a new cycle of hardware upgrades in 2011, although much will depend on business and © Business Monitor International Ltd Page 31 Israel Information Technology Report Q4 2012 consumer confidence. More than 50% of Israeli computer users are estimated to still be using the Windows XP operating system. Market Drivers The Israeli IT market has several positive fundamentals that should keep it in positive territory during BMI's five-year forecast period. Household computer penetration of around 75% offers potential for further growth. High internet penetration and growing broadband penetration are drivers for the retail segment, along with interest in multimedia and mobile computing applications and the new popularity of mini-computers. Per capita IT spending is expected to rise from US$784mn in 2012 to US$1.0bn by 2016. Spending by key IT spending verticals such as defence and financial services are somewhat insulated from economic vicissitudes. Vendors will target projects across a range of sectors from government to financial services, telecoms and utilities. Regulatory compliance will continue to necessitate IT spending by banks and the financial services sector, which accounts for about 15% of Israeli IT spending. Another 50% of IT spending is accounted for by government and military projects, which will have a relatively low sensitivity to economic downturn compared with the commercial sector. Government IT and digital-divide initiatives are important sources of opportunity for vendors, with recent projects ranging from government e-services portals to healthcare. The government remains determined to preserve the country's status as a high-tech powerhouse and drive development of the knowledge economy. While the defence sector is, and is expected to remain, the single most important vertical, investments by financial sector organisations should mean more large outsourcing deals. Other sectors of opportunity will include healthcare and telecoms, as well as infrastructure, transport and the small office and home office sector. Opportunities As a result of this activity, IT services are expected to display the highest growth over the forecast period. Growing enthusiasm for outsourcing is putting Israel on the map, with some recent large tenders such as HP's contract for outsourced management of the Israeli navy's IT infrastructure. The economic slowdown may reinforce this trend. Israel is also emerging as a location for some business process outsourcing (BPO) functions helped by government incentives. However, much depends on there being a sustained improvement in the economy, as well as the overall political environment. One potential demand driver will be organisations looking for help in using efficiencies from cloud computing, such as SaaS and Infrastructure-as-a-Service. Particular areas of opportunity for cloud computing include banking and retailing, as organisations in those fields look to save money on hardware. © Business Monitor International Ltd Page 32 Israel Information Technology Report Q4 2012 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. Summary Although the Israeli economy is vulnerable to continued global economic headwinds, BMI believes that IT spending has sufficient strength in key demand verticals to maintain a positive trajectory. The hardware market is forecast to grow from US$2.6bn in 2012 to US$3.2bn in 2016, with PC sales projected to rise from an estimated US$2.1bn to US$2.6bn. Over the period, software spending is expected to increase from an estimated US$1.3bn to US$1.8bn and services from an estimated US$2.1bn to US$2.8bn. Table: Israel IT Sector – Historical Data & Forecasts (US$mn Unless Otherwise Stated), 2009-2016 2009e 2010e 2011e 2012f 2013f 2014f 2015f 2016f IT market 4,633 5,143 5,708 5,976 6,325 6,740 7,284 7,838 IT market as % GDP 0.3% 0.2% 0.2% 0.2% 0.2% 0.3% 0.3% 0.3% Hardware (computer market sales) 2,131 2,263 2,480 2,562 2,676 2,812 2,997 3,179 Services 1,529 1,697 1,960 2,073 2,216 2,385 2,603 2,829 Software 973 1,131 1,268 1,341 1,434 1,543 1,684 1,831 1,726 1,833 2,014 2,101 2,216 2,329 2,487 2,638 192 204 223 231 241 253 270 286 PCs (including notebooks) Servers e/f = BMI estimate/forecast. Source: BMI. ITU (Internet and broadband penetration) © Business Monitor International Ltd Page 33 Israel Information Technology Report Q4 2012 Industry Forecast Internet Table: Internet Data And Forecasts, 2009-2016 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f No. of internet users, '000 4,585 4,982 5,341 5,644 5,906 6,149 6,358 6,522 No. of internet users/100 inhabitants 63.1 67.2 70.6 73.3 75.5 77.4 78.9 79.7 No. of broadband internet subscribers, '000 1,754 1,810 1,893 1,975 2,056 2,135 2,215 2,294 24.2 24.4 25.0 25.7 26.3 26.9 27.5 28.0 No. of broadband internet subscribers/100 inhabitants e/f = BMI estimate/forecast. Source: ITU, BMI As with our fixed-line and mobile telephony forecasts, we have revised and extended our forecast for the development of Israel's internet user and broadband subscriber markets. Our new set of forecast figures runs to the end of 2016. We estimate that there were a total of 5.34mn users as of 2011, giving Israel a penetration rate of 70.6%. We expect steady, but slowing, growth in the number of internet users to continue for the duration of our forecast, resulting in 6.52mn internet users in 2016, equivalent to a penetration rate of 79.7%. Meanwhile, owing to a lack of reliable data on the number of mobile broadband Industry Trends – Internet Sector 2009-2016 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 suggests that the number of fixed broadband subscribers had increased to around 1.874mn at the end of September 2011, up by 3.5% from 1.81mn at the end of 2010. BMI estimates that, by the end e/f = BMI estimate/forecast. Source: BMI of 2011, Israel's broadband subscriber base had risen to 1.893mn; this is equivalent to a penetration rate of 25% and reflects full year growth of 4.6%. © Business Monitor International Ltd Page 34 Israel Information Technology Report Q4 2012 Over the next five years ended 2016 we envisage average annual growth of 3.9% for the Israeli broadband sector. This will see the subscriber base reach 2.29mn subscribers, equivalent to a penetration rate of 28%. 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 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. Meanwhile, recent months have seen considerable reductions in the price of broadband tariffs being offered by the major operators. Another development likely to stimulate growth is the introduction of LLU, which will give alternative operators access to Bezeq's network and will stimulate much greater competition. © Business Monitor International Ltd Page 35 Israel Information Technology Report Q4 2012 Macroeconomic Forecast Growth To Slow Heading Into 2013 BMI View: Israel's economy will slow in H212 and early 2013, as the government is set to rein in spending, while leading indicator data paint a relatively negative picture for private consumption and fixed investment. As a result, we have lowered down our forecasts for real GDP to grow 2.8% and 3.3% in 2012 and 2013 respectively, from 2.9% and 3.5% previously. The Israeli economy remains in a soft patch, with real GDP growth averaging 3.3% in H112, compared to real growth of 4.8% in 2011. We see private consumption and government spending slowing in H212 and early 2013 compared to the first half of the year, while the country's net export position will continue to weigh on headline growth. As a result, we forecast real GDP increasing 2.8% and 3.3% in 2012 and 2013 respectively, down from our previous forecasts of 2.9% and 3.5%. That said, we maintain our relatively bullish view on Israel's medium-term growth outlook, with real growth projected to average 4.1% over the 2013-2016 period. Private Consumption Outlook Private consumption grew 3.6% y-o-y in seasonally adjusted terms in Q212, after increasing only 1.9% yo-y in both Q411 and Q112. The inflationary outlook will certainly prove conducive to supporting household spending, with our baseline scenario seeing headline CPI averaging only 2.2% this year. More importantly, data from the Central Bureau of Statistics show that the unemployment rate fell to 6.5% of the active population in July, from 7.1% in June. That said, we do not see private consumption increasing at a rapid clip over the coming quarters. The government's policies will be less supportive of private consumption, with parliament having approved in August a package of austerity laws that included a 1.0% rise in the value-added tax to 17.0% from September 1 (see our online service, August 3, 'Further Austerity Measures Unlikely'). In addition, there are indications that consumption could be on the wane, with Bank Hapoalim's Consumer Confidence Index falling 3.4% m-o-m in August to 125.6 points, while Bank Hapoalim's Purchasing Managers Index (PMI) for July 2012 fell 5.9% m-o-m to 41.9%, mainly as a result of slowing manufacturing activity. As a result, we forecast private consumption growing 3.2% and 3.3% in 2012 and 2013 respectively, down from our previous forecasts of 3.5% and 4.0%. Fixed Investment Outlook Fixed capital formation grew 7.1% y-o-y in Q212, compared to its quarterly average of 17.5% in 2011, and we expect the current downtrend to continue heading into 2013. That said, fixed investment growth will outpace other segments of the economy. The prospects for the real estate sector are encouraging in this regard, with the total volume of real estate transactions – which fell throughout much of 2011 – having increased approximately 20.0% y-o-y in Q112, and 17.0% in May (see 'Housing Market In Better © Business Monitor International Ltd Page 36 Israel Information Technology Report Q4 2012 Shape', July 30). We forecast gross fixed capital formation growing 7.0% and 6.0% in 2012 and 2013 respectively. Government Consumption Outlook Government consumption growth averaged 8.2% and 3.2% y-o-y in Q112 and Q212 respectively, up from its quarterly average growth of 2.0% y-o-y in 2011. As a result of the approval of the aforementioned austerity package in August, public consumption will remain subdued over the coming quarters. That said, the government will not trim spending drastically, as the cuts are likely to prove highly unpopular among the public. We see government consumption growing 3.7% in 2012 and 2.7% in 2013 respectively, down from our previous forecasts of 5.5% and 3.0%. Net Exports Outlook We see Israel's net export position coming in deficit to the tune of 1.1% and 0.4% of GDP in 2012 and 2013 respectively, up from a deficit of 1.9% of GDP in 2011. Import growth increased 10.2% and 4.2% y-o-y in Q112 and Q212 respectively, down from its quarterly average growth of 11.6% in 2011. We believe that the current downtrend will persist over the coming months, particularly as household consumption gradually ticks lower. We forecast total imports growing 3.0% and 4.0% in 2012 and 2013. Total exports fell 1.7% and 1.1% in Q112 and Q212, having been in a constant downtrend since Q110. Given the relatively bleak state of the global economy, we expect exports to remain relatively subdued over the coming quarters. Approximately 60.0% of Israel's exports are directed to the US and the eurozone, and we project the US economy to grow only 2.0% in real terms in 2012, while the economy in the eurozone will contract 0.6%. As a result, we forecast total exports increasing only 0.5% and 3.0% in 2012 and 2013. Risks To Outlook Risks to our outlook lie mainly to the downside. In particular, the potential for a further deterioration of the situation in the eurozone remains elevated, which would weigh heavily on Israeli exports and foreign investment inflows. An eagerly awaited European Central Bank announcement on September 8 of a potential new framework for purchasing government bonds fell short of achieving a lasting resolution for the crisis (see 'Another ECB 'Game Changer' Fails To Deliver', September 9), and underpinned our view that the common currency bloc would 'muddle through' at best over the coming quarters. © Business Monitor International Ltd Page 37 Israel Information Technology Report Q4 2012 Table: Israel – Economic Activity, 2011-2016 2011 2012f 2013f 2014f 2015f 2016f 869.9 916.0 969.2 1,034.5 1,112.6 1,205.2 243.1 231.9 230.8 292.2 316.1 344.3 4.8 2.8 3.3 4.0 4.3 4.6 32,147 30,138 29,513 36,807 39,211 42,078 7.6 7.7 7.8 7.9 8.1 8.2 Industrial production index, % y-o-y, 1,3 ave 7.0 7.2 6.5 3.8 4.2 4.8 Unemployment, % of labour force, 2,3 eop 5.4 6.5 6.5 6.5 6.5 6.5 Nominal GDP, ILSbn 3 Nominal GDP, US$bn 3 Real GDP, % change y-o-y GDP per capita, US$ Population, mn 3 3 4 f = BMI forecast. 1 Seasonally adjusted; 2 Seasonally adjusted, methodology was adjusted in 2012. Source: 3 Central Bureau of Statistics/BMI; 4 World Bank/UN/BMI © Business Monitor International Ltd Page 38 Israel Information Technology Report Q4 2012 Competitive Landscape The Israeli IT services market is competitive. However, no vendor has a share of more than 15%. Leading multinational competitors IBM and HP are both estimated to have shares of less than 10%. In the PC market, the top three vendors, HP, Lenovo and Dell, enjoy a combined market share approaching 50%. Most PC market growth in 2011 was driven by growth in the laptop segment. HP was again the overall PC market leader in the MEA region in Q311, with growth of 37.1%, according to IDC. Dell was in second place. The Chinese leader has built a strong position in the Israeli market following its purchase of IBM's PC unit back in 2005 and in 2012 the company is continuing to increase its investment in Israel. In 2012, Lenovo claimed that it had top spot in the commercial laptop market in the country, and that it was the second largest PC vendor overall. Acquisitions and strategic investments are part of Lenovo's strategy to consolidate its position in the Israeli market, and in February 2012 the vendor announced that it would invest in Vertex Venture Capital's new venture capital fund. The investment is aimed at helping Lenovo to build a solid R&D base in the country, with priority areas including enterprise IT, infrastructure and greentech, and digital media technology and applications. Lenovo is far from the only multinational PC vendor to be increasing its R&D investment in Israel. In early 2012, it was reported that iPad and Mac producer Apple was looking to open a research centre in Haifa. The new facility is located at the Matam technology district, which also houses facilities of Intel, Microsoft and Philips among others, and was due to become operational by March 2012. Apple's new investment followed on the vendor's recent acquisitions of Israeli NAND flash technology manufacturer Anobit for a reported US$390mn. Meanwhile, In 2011 US PC leader Dell inaugurated a new Israeli R&D centre, which is part of the company's Enterprise Storage Business. The new centre is based on Exanet, which Dell acquired in 2010. The centre will focus on developing storage technologies and cloud computing solutions. Meanwhile, Acer's inventory problems resulted in the vendor losing ground in the regional market. Israel's domestic IT service companies have strong advantages owing to local knowledge and contacts. For example, Ness Israel's long-term relationship with the Israeli Department of Defence makes it a strong player in the defence and homeland security vertical. Despite their global ambitions, Israel remains an important market for these companies and typically accounts for 40-50% of revenue. This proportion typically increased during the recent global economic crisis, due to lower demand from the US and Europe and the company's relative strength in their home markets. In December 2011, NessPRO (Ness' software distribution group) and its partner EMC won a key strategic project from the Israeli government to implement the EMC Documentum enterprise content © Business Monitor International Ltd Page 39 Israel Information Technology Report Q4 2012 management (ECM) system as the standard for all ministries and offices. The project was considered one of the most significant pan-government department tenders issued in recent years and is part of the government's long-term strategy for a unified infrastructure to serve diverse document management and archiving requirements across the government. Matrix, the Israeli IT services market leader, also reported growth in revenue and profit in 2011 owing 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. In Q311, Matrix reported 16.6% growth in revenue to a record ILS435mn, preserving its leading position in the Israeli value-added services market. Matrix's core software and services division reported 19% growth in that quarter, and revenue of ILS302mn. Meanwhile, Ness Israel reported modest annualised revenue growth of just 1% in Q211, to US$141mn. This was down from annualised growth of 3% in Q111, to US$137.3bn. Revenue from the Israeli market was 42% of the total. Among major contracts signed in H111 was a US$75mn five-year agreement 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. Another big win was a US$17mn deal with Israel Electric Corporation, for which Ness will implement a range of SAP solutions and provide support over a five-year period. Meanwhile, in Q211 Ness also signed a US$6mn SAP implementation project for a leading insurance group and four other US$1mn-plus projects across several verticals. Despite the success of several strong local vendors, a share of government tenders is won by international players. Recent tender winners include Dell and HP, whose local suppliers have a contract to supply desktops and laptops to the government. The government receives favourable prices under the terms of the agreement, which include a strong service element. Despite Intel's substantial presence in Israel, the tender did not include Intel processors, but those of AMD instead. The national smart ID card project has also been an important area for major IT vendors such as IBM, HP and Sun, with 11 different vendors involved at various stages since 2001. A number of multinationals are well embedded in the Israeli market. Following the recent merger with EDS, HP is expected to take around 10% of the Israeli IT services market in 2010. HP Israel's software division hosts HP's biggest R&D centre worldwide, and the company also has significant production facilities in Israel. With a total of 5,000 employees, HP reported computer sales of around US$850mn in 2007. The growing emphasis of many multinational IT vendors on software and services revenues, has led several of them to direct more investment in R&D at the Israeli market. Israel's strong reputation as a hotbed for innovative software development has made Israeli companies popular takeover targets for multinationals. US vendor Dell, a traditional manufacturer of PCs and related hardware, is one vendor © Business Monitor International Ltd Page 40 Israel Information Technology Report Q4 2012 aiming to make a transition to being a comprehensive provider of IT and computer solutions. The company has launched a plan to expand its presence in Israel, with the establishment of a new R&D centre in the country. Dell, which expects US$60bn in sales in 2012, spent just 1.7% of sales on R&D in the first quarter, well below the level reported by many of its industry peers. The company's sofware business is currently worth around US$400mn, less than 1% of its total revenues, but is targeted to quintuple by 2015. Dell's strategy for the Israeli market is being managed by Dell Europe, and includes passive investments in early-stage companies with the objective of obtaining access to tchnology developments. 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 looking to develop more mobile business applications that could be deployed across a variety of devices, including tablets. Meanwhile 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 hte creation of the company's Real Time Offer Management solution, which is currently being tested by French supermarket chain Casino. SAP Israel has been voted one of SAP's top-performing units and the company has a strong local client base. In September 2010, Ness won a US$3.7mn, 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 US$2.2mn. In 2008, SAP reached an agreement with Ness to purchase the latter's SAP Sales and Distribution division in Israel. The acquisition was in line with SAP's focus on enhancing direct operations in Israel and other high-growth Middle Eastern markets. SAP implementations are a major IT services category in Israel, and SAP aims to be closer to its customers and partners. However, SAPcontinue to work with Ness as a systems integrator and the latter will also retain its SAP Academy training centre. Meanwhile, in 2009, SAP's major enterprise software rival Oracle was in discussion with Israel Credit Cards Cal (ICC-Cal) concerning a major computerisation project being implemented by Oracle. Oracle initiated the project, to replace and upgrade ICC-Cal's computer systems relating to credit card management 18 months ago. However, differences had apparently arisen between Oracle and ICC-Cal, which is jointly owned by Israel Discount Bank and First International Bank of Israel, concerning the project. Another enterprise software player, US vendor CA Technologies, is extending its Israeli university relationship program, with plans announced in 2012 to roll out a new Innovation Centre in partnership © Business Monitor International Ltd Page 41 Israel Information Technology Report Q4 2012 with Tel Aviv University. The new centre is expected to focus on areas such as IT management and cyber security. Israeli storage companies appear a hot segment for multinational investors currently. Dell's sole acquisition to date of an Israeli company was its US$12mn acquisition of storage solutions developer Exanet in early 2010. Dell established its &RD centre on the basis of Exanet's team. Meanwhile, in mid2012, shares in Israeli storage business company Mellanox Technologies surged on rumours that either IBM or Oracle might buy the firm Microsoft Israel has an annual turnover of around US$1bn. It hopes its Windows 7 operating system, launched in October 2009, will continue to boost sales throughout 2011, with around half of Israeli computers still based on the Windows XP operating system. In summer 2009, Microsoft continued to lay the groundwork for the new operating system launch and released the enterprise version of the software in August. The company anticipated support from leading PC makers would underpin success for the new system, despite some caution from businesses. Israel also hosts an important research and development centre for Microsoft. As of Q111, the centre, which employs 600 workers, was reported to be developing 13 new products in various areas. In 2010 the centre launched Microsoft's new unified access gateway (UAG) product for the Windows 2008 Server R2. The UAG product is already used in the Windows 7 operating system to provide PCs with online access to enterprise servers. The product positions Microsoft to make a play for the SaaS market opportunity. About 70% of the centre's work is now focused on cloud computing, with Microsoft Israel expecting to hire up to 100 new workers for cloud computing projects. Cloud computing is a major vendor focus and will continue to attract investment from all sections of the industry chain. In April 2011, telecoms equipment vendor Alcatel-Lucent unveiled a new cloud computing centre in Israel. The global centre will develop cloud-based and open architectures for communications carriers. While US companies often have a long history in Israel, the major Indian vendors such as Satyam Computer Services and Tata Consultancy Services have built their presence in the Middle East over the past few years. Tata opened an Israeli office in 2006. Satyam has also experienced strong growth in the Middle East region and is looking to grow its consulting and outsourcing businesses by 100% over the next few years. Internet Competitive Landscape Once again, Israel tops the regional broadband penetration rate and retains its position as the second-most developed broadband market in the Asia continent, behind South Korea. At end-2005, Israel's household penetration rates stood at 65%, against South Korea with 75%. Following in Israel's footsteps is Bahrain. The kingdom has increasingly focused on raising take-up of ADSL services through various promotions, © Business Monitor International Ltd Page 42 Israel Information Technology Report Q4 2012 such as reducing tariff prices by as much as 50%, and projects involving greater network roll-outs. However, the bulk of the MEA region is underdeveloped, with penetration rates less than 2%. This is largely the result of high tariffs for broadband services, as many operators in the region have a near monopoly and can dictate prices. Moreover, with many ISPs leasing lines from these incumbent operators, they are in turn also charged high rental prices, which are passed on to the end-user. Israel experienced dramatic growth in the number of internet users in recent years, with penetration rising from around 17% in 2000 to 56% by 2005. BMI estimates penetration rose to 64% at end-2009. © Business Monitor International Ltd Page 43 Israel Information Technology Report Q4 2012 Company Profiles Ness Strengths Weaknesses Opportunities Threats Overview Acquisition by CVCI will see new investment into operations. Large international presence offering wide client base. Several technology centres in India, one of the fastest growing IT markets. Acquisition by private equity rather than technology company. Slow revenue growth. Divestment of non-core assets will allow greater focus on core businesses. Major deals with banks and governments provide growth. Israel's IT market is competitive with several players. 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 all-cash transaction valued at approximately US$307mn. Ness announced on October 11 2011 that the acquisition completed. The company subsequently delisted and ceased trading on the Nasdaq Global Select Market and the Tel Aviv Stock Exchange. Ness specialises in outsourcing, systems integration and application development, software and consulting as well as quality assurance and training. The company acquired Gilon Business Insight, a business intelligence provider, in H110. During 2010, the company also announced plans to sell its software distribution business in Europe. The company had already signed an agreement to sell its Asia Pacific integration and application development operations. Ness announced it would continue to provide outsourcing services from its development centres in India, Bangalore, Mumbai and Hyderabad, and from its centres in Israel, Eastern Europe and Asia Pacific. With 7,800 employees, Ness maintains operations in 16 countries and partners with more than 100 software and hardware vendors worldwide. In 2010, Israel made up 37% of Ness' quarterly revenue, with North America at 33%, Europe at 28% and the rest of the world at 2%. Strategy Ness' plans include 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. Ness forecasted top line growth and operating margin expansion in 2011 with a trend of sequentially increasing quarterly revenue, except for the second quarter. Strategic plans may change as the company's acquisition by CVCI completed in late 2011. There was no indication of a change in strategy for the company and the operations will remain headquartered in Tel Aviv, Israel, and Teaneck, New Jersey, USA. © Business Monitor International Ltd Page 44 Israel Information Technology Report Q4 2012 Financial Results Ness reported revenue of US$141mn in Q211, with just 1% annualised growth. 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. Ness Israel reported modest annualised revenue growth of 1% in Q211, to US$141bn. This was up 3% from Q111. 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 US$547mn. Israel accounts for around 42% of Ness' revenue. Among major developments in H111 was a US$75mn 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%. Ness Israel reported full-year 2010 revenue of US$571.8mn, up 12% y-o-y. Among major projects in 2010, the company revealed it had completed the successful rollout of a next generation court system for the Israeli Courts Administration and announced a large military intelligence system contract with the Ministry of Defence. Ness also revealed in June 2010 that its outsourcing contract with Israel's Ministry of Environmental Protection had been extended for three years in a deal valued at around US$2.6mn. The company also won a US$4mn healthcare sector outsourcing contract with Israel's Clalit Health Services in June. Company Developments On September 14 2009, Ness Technologies launched its stock on the Tel Aviv Stock Exchange (TASE), having received approval for the listing from TASE authorities. Ness Technologies common stock will continue to be listed on the NASDAQ exchange in the 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 company witnessed a 19% decline in revenue in Q309, following from a 20% decline in Q209, although more than half of this headline decline was due to currency translation from non-dollar revenue. 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. Contracts 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 US$17mn 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 © Business Monitor International Ltd Page 45 Israel Information Technology Report Q4 2012 H111 was a US$17mn deal with Israel Electric Corporation, for which Ness will implement a range of SAP solutions and provide support over a five-year period. Other successes included a US$10mn deal with the Israel Ministry of Defence and a US$5mn deal with Derect Eretz, the operator of the Trans-Israel toll road. In September 2010, Ness won a US$3.7mn, 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 US$2.2mn. The company continued to be strong in the financial services sector, with a US$1.1mn contract win in October 2010 from Israel Direct Insurance (IDI) to implement a company-wide, SAP-based ERP system. The new system will comprise financial, logistics and HR modules. At the end of 2009, Ness won a five-year ILS42mn (US$11.2mn) outsourcing deal from Israel's Ministry of Immigration Absorption. Under the contract, Ness will operate and maintain the ministry's IT systems, which support 600 users. The company also won an US$11mn outsourcing contract from the First International Bank of Israel and a US$4mn contract from the Israeli ministry of the interior. Ness had been on the rise with several landmark deals in the past two years. These included an eight-year US$120mn outsourcing contract, including hardware, with the First International Bank of Israel, in which Ness is serving as lead sub-contractor to EDS. Ness also made the headlines for a 10-year multimillion outsourcing contract with Israel's Yellow Pages, which, although far smaller at approximately US$8.5mn, was one of the largest projects in Israel at that time. The project was subsequently extended. Financial Data Company Details Revenues (Global, 2010): US$571.8mn Revenues (Global, Q111): US$137.3mn Revenues (Global, Q211): US$141.3mn Ness Israel Ness Tower Atidim Industrial Park P O Box 58152 Tel Aviv 61580 Israel +972/3 766 6800 3 766 6809 www.ness.com © Business Monitor International Ltd Page 46 Israel Information Technology Report Q4 2012 IBM Strengths Technology firm with a century-long history and operations across the globe. Strong presence in high-growth emerging markets such as Brazil, China and India helps offset the impact of economic slowdown the US and Europe. Diversified portfolio of products and services across computer hardware, computer software, IT services and IT consulting. Large client base among leading companies across many industry verticals. Large IP portfolio covering most industries and every discipline of science and technology. Diverse team of skilled scientists, researchers, engineers, developers and technologists. Weaknesses Strong revenue and profit growth despite high operating expenses. High operating costs squeeze profit margin. Large number of employees (about 426,751 at the end of 2010). Communication across different countries is challenging in view of the size of the company. Opportunities Strong brand aids acquisition and retention of high-value customers. Global reach improves prospects for local opportunities. Continued investment in R&D will help maintain leading position in technology and innovation. Threats Increasing competition in services market from major players including Dell, Accenture, HP and Oracle. Heavy dependence on Microsoft in computer services division could be a weakness should Microsoft’s strategy change. Overview Increasing generic competition is impacting IBM’s margins. International Business Machine (IBM) is a global provider of information technology (IT) products and services. IBM manufactures and sells computer hardware and software, as well as a wide range of IT and consulting services. The company was founded in 1910 as the Computing Tabulating Recording Corporation (CTR) through the merger of three companies: the Tabulating Machine Company, the International Time Recording Company and the Computing Scale Corporation. CTR changed its name to IBM in 1924. IBM offers its products through its global sales and distribution organisation as well as through a variety of third party distributors and resellers. IBM is listed on the New York Stock Exchange and is ranked among the largest publicly traded technology companies in the world with a market capitalisation of more than US$222bn as of January 2012. Some of the company’s biggest institutional shareholders as of © Business Monitor International Ltd Page 47 Israel Information Technology Report Q4 2012 September 20 2011 included State Street Corp (5.59%), Berkshire Hathaway Inc (4.49%), Vanguard Group Inc (4.33%) and Blackrock Institutional Trust (2.52%). Business Divisions The company’s main services are divided into: Global Technology Services – provides IT infrastructure and business process services, including strategic outsourcing, process, integrated technology and maintenance services, as well as technology-based support services. Global Business Services – offers consulting and systems integration and application management services. Software – offers middleware and operating systems software, such as WebSphere software to integrate and manage business processes; information management software for database and enterprise content management, information integration, data warehousing, business analytics and intelligence, performance management and predictive analytics; Tivoli software for identity management, data security, storage management and datacentre automation; Lotus software for collaboration, messaging and social networking; rational software to support software development for IT and embedded systems; business intelligence software, which provides querying and forecasting tools; SPSS predictive analytics software to predict outcomes and act on that insight; and operating systems software. Systems and Technology – provides computing and storage solutions, including servers, disk and tape storage systems and software, point-of-sale retail systems and microelectronics. Global Financing – provides lease and loan financing to end-users and internal clients, commercial financing to dealers and remarketers of IT products and remanufacturing and remarketing services. IBM’s solutions serve public institutions, private business and not-for-profit organisations across more than 20 industry verticals. Strategy IBM intends to be a major player in the enterprise mobility market. In January 2012, the company announced plans to buy mobile enterprise application platform (MEAP) vendor Worklight. Worklight’s software supports HTML5, hybrid and native applications for smartphones and tablets with industry standard technologies and tools. IBM’s move follows a study of more than 3,000 CIOs conducted by the company in 2011 in which 75% of respondents identified mobility solutions as one of their top spending priorities. With the acquisition of Worklight, IBM is well placed to compete with some of its biggest rivals in the enterprise mobility arena. In 2010, SAP acquired mobile applications development company Sybase while Oracle is expected to buy an MEAP vendor in 2012. IBM reported EPS of US$13.44 in 2011, up by 15.2% y-o-y from US$11.67 in 2010. By focusing on key growth initiatives, including growth markets, business analytics, ‘Smarter Planet’, and cloud computing, IBM forecasts EPS of over US$14.85 in 2012 and at least US$20 in 2015. © Business Monitor International Ltd Page 48 Israel Information Technology Report Q4 2012 Recent Financial For the three months ended December 31 2011, IBM recorded a 2% y-o-y increase in Performance revenue to US$29.5bn. An increase in software sales helped to offset slumping hardware demand as a result of the slowdown in the global economy. A breakdown of the performance of each business segment shows that Global Technology Services segment revenue increased by 3% y-o-y to US$10.5bn and Global Business Services revenue were also up 3% y-o-y to reach US$4.9bn, while revenue from the Software segment were US$7.6bn, an increase of 9% y-o-y. The company’s Systems and Technology segment, which includes hardware sales, and Global Finance segment experienced a different fortune with revenue decline of 8% y-o-y and 13% y-o-y to US$5.8bn and US$548mn respectively. In terms of geography, the Americas Q411 revenue was US$12.5bn, an increase of 3% y-o-y. Revenue from Europe, Middle East and Africa (EMEA) was US$9.6bn, up by 1% y-o-y. Asia Pacific revenue increased by 2% y-o-y to US$6.7bn, while OEM revenue was US$714mn, down 9% y-o-y. Despite IBM’s modest revenue growth for Q411, the company reported a net profit of US$5.5bn, up 11% y-o-y during the same period. Fourth quarter profit was driven by tighter expenses and strong revenue growth in the Software segment, especially in the focus areas of smarter commerce, business analytics and storage. IBM recorded total revenue of US$106.9bn for the full year ended December 31 2011. This represented an increase of 7% y-o-y compared with US$99.9bn in 2010. Revenue from Global Technology Services increased 7% y-o-y to US$40.9bn. Revenue from Global Business Services were up 6% y-o-y at US$19.3bn. The Software segment recorded the highest growth in 2011 with an increase of 11% y-o-y US$24.9bn. Systems and Technology segment revenue increased 6% y-o-y, despite a slowdown in Q411, to reach US$19bn, while the Global Financing segment saw a decrease of 6% y-o-y to reach US$2.1bn. From a geographic perspective, the Americas’ full-year revenue were up by 7% y-o-y at US$44.9bn. Revenue from EMEA were US$34.0bn, representing an increase of 7% y-o-y. Asia Pacific revenue increased 9% y-o-y to US$25.3bn, while OEM revenue were down by 2% y-o-y at US$2.7bn. Revenue from growth markets increased by 16% y-o-y (11%, adjusting for currency), and represented 22% of IBM’s total geographic revenue. Revenue in the BRIC countries – Brazil, Russia, India and China – increased by 19% y-o-y (16%, adjusting for currency). Net profit for the year ended December 31 2011 was US$15.9bn, an increase of 7% y-o-y compared with US$14.8bn in 2010. In January 2012, the IBM board of directors declared a regular quarterly cash dividend of US$0.75 per common share, payable March 10 2012 to stockholders of record February 10 2012. IBM has paid consecutive quarterly dividends every year since 1916. Recent Activities In February 2012, IBM acquired Emptoris Inc to build its smarter commerce business, which helps companies manage and analyse supplies and spending. Emptoris’ tools help companies manage supply chains and purchasing. In January 2012, IBM introduced new software to help organisations better manage and © Business Monitor International Ltd Page 49 Israel Information Technology Report Q4 2012 secure the increasing use of smartphones and tablets in the workplace, while also managing laptops, desktops and servers. In addition to the new mobile security and management software, IBM also announced the acquisition of Worklight. Worklight accelerates IBM’s comprehensive mobile portfolio, as its services enable global organisations to leverage the proliferation of all mobile devices by developing different versions of their apps for multiple smartphone and tablet OS platforms. In January 2012, IBM launched the IBM Netezza Customer Intelligence Appliance. The new analytics appliance, which was jointly developed by IBM, Aginity and Cognos Software, analyses up to petabytes of big data including consumer sales data and online shopping trends to help retailers gain actionable insight on buying patterns. Clients can run complex real-time analytics in a matter of seconds to improve customer experience, shift marketing campaigns and boost sales. In December 2011, IBM announced plans to buy cloud-based analytics software provider DemandTec for US$440mn in an all-cash transaction. DemandTec has about 450 customers worldwide in retail and consumer products. The company also has 31 patents in the areas of pricing, response analysis and promotion analysis. DemandTec’s pricing functionality would add to existing business analytics tools focused on marketing, mobile devices and other areas. The acquisition of DemandTec is part of IBM’s wider strategy to build its ‘Smarter Commerce’ business segment, which the company has said could be worth US$20bn or higher by 2015. In December 2011, IBM agreed to buy Curam Software, a machine-to-machine (M2M), cloud and data analytics program offering improved efficiency and new services to cities and governments to strengthen its Smarter Cities initiative. Curam Software provides organisational software to more than 80 government projects, improving efficiency in the provision of social programs. Its customers are primarily health and human services, workforce services and social security organisations. Curam and its 700 employees will be integrated into IBM’s software group and become a component of its Smart Cities initiative. IBM acquisitions in 2011 include the purchase of security intelligence software provider Q1 Labs in October 2011, crime data intelligence software developer i2 in August 2011 and risk management analytics software developer Algorithmics for US$387mn in September 2011.Meanwhile, IBM also announced US$100mn of internal investment to research the analysis of large unstructured datasets. However, while IBM has been active in 2011, it is nowhere near the 17 acquisitions it made in 2010 for a total of US$6bn. In September 2011, IBM and Intel Corp announced plans to invest US$4.4bn over five years to create a hub for next generation computer chip technology in New York. IBM will spend US$3.6bn to develop computer chips using 22-nanometer and 14-nanometer process technology. Financial Data Annual Revenues (2006): US$91.4bn Annual Revenues (2007): US$98.8bn Annual Revenues (2008): US$103.6bn © Business Monitor International Ltd Page 50 Israel Information Technology Report Q4 2012 Company Data Annual Revenues (2009): US$95.8bn Annual Revenues (2010): US$99.9bn Annual Revenues (2011): US$106.9bn Net Income (2006): US$9.4bn Net Income (2007): US$10.4bn Net Income (2008): US$12.3bn Net Income (2009): US$13.4bn Net Income (2010): US$14.8bn Net Income (2011): US$15.9bn IBM Corporation 1 New Orchard Road Armonk, New York 10504-1722 USA www.ibm.com © Business Monitor International Ltd Page 51 Israel Information Technology Report Q4 2012 Hewlett-Packard Strengths HP is the world's largest manufacturer of personal computers and enjoys global brand recognition. Extensive distribution channel. Strong presence in the enterprise and consumer markets; also a key government agencies supplier. Weaknesses Strong inventory (negative cash conversion cycle) and supply chain management. Healthy financial position, enabling Dell to grow through mergers and acquisitions. Traditional desktop business under threat from mobile alternatives; even so, notebook sales are also falling as the tablet form factor is increasingly favoured. HP's own foray into the tablet market was badly handled and any future investment in tablets would be questioned by investors and analysts. Low-cost rivals (mainly from Asia) undermine what little traction HP still has in the mobile computer field. Expansion into the Big Data and cloud computing sectors requires years of investment with few immediate returns. Opportunities With deep expertise and a significant client base in the servers market, HP is well placed to benefit from growing demand for Big Data and cloud computing solutions. Deep cash resources have allowed HP to round out key skills and knowledge areas formerly lacking, enabling it to compete on a broader front with key competitors or outpace other rivals. Threats The PC-manufacturing arm of HP accounts for more than 25% of revenue, yet sales are falling and margins continue to be pared back. A slow recovery in the hard disk drive manufacturing sector would prolong inventory tightness, which could see PC prices remain elevated. Further deterioration in the global economy would dampen consumer and enterprise demand. Multiple IT and new business acquisitions could take time to fully integrate as existing and prospective clients need reassurance that its strategy will not change further and that rivals will not produce more compelling solutions. Overview Hewlett-Packard Company (HP) is a global provider of products, technologies, software, solutions and services to individual consumers, small and medium-sized businesses and large enterprises, including customers in the government, health and education sectors. Key offerings span: personal computing; multi-vendor customer services; imaging and printingrelated products and services; and enterprise information technology infrastructure. Currently, the company is transforming itself to deal with the growing demands for so-called 'Big Data' solutions and cloud computing platforms. This transformative process has led, in equal © Business Monitor International Ltd Page 52 Israel Information Technology Report Q4 2012 measure, to controversial and well received strategic decisions. The company continues to be scrutinised closely by analysts keen to see a successful reorientation. Analysts also see HP as a barometer for broader trends in technological development. HP's shares are primarily traded on the New York Stock Exchange and, as of January 2012, top shareholders included Dodge & Cox (5.9%), State Street Global Advisors (5.2%), Vanguard Group (4.1%), BlackRock Institutional Trust Company (3.6%), State Farm Insurance Companies (2.1%), AllianceBernstein (1.9%), Capital Research Global Investors (1.8%) and Fidelity Management & Research Company (1.7%). Some of these companies also own shares through mutual funds. Business Structure At the time of writing, HP was organised around seven business segments: Personal Systems Group (PSG); Services; Imaging and Printing Group (IPG); Enterprise Servers, Storage and Networking (ESSN); HP Software; HP Financial Services; and Corporate Investments. PSG provides PCs (desktops, notebooks, tablets), calculators and related accessories, software and services. PCs predominantly utilise the Microsoft Windows OS and use processors supplied by Intel and AMD. Services provides consulting, outsourcing and technology services across infrastructure, applications and business process domains. Services is divided into four main business units: infrastructure technology outsourcing, technology services, applications services and business process outsourcing. IPG provides consumer and commercial printer hardware, supplies, media and scanning devices. IPG is also focused on imaging solutions for commercial markets. ESSN provides server, storage and networking products in a number of categories. HP's Converged Infrastructure portfolio of servers, storage and networking combined with HP Software's Cloud Service Automation software suite comprise HP's CloudSystem. ESSN aims to optimise the combined product solutions required by different customers and provide solutions for a wide range of environments. Products are offered under the following categories: Industry Standard Servers; Business Critical Systems; Storage; and Networking. HP Software provides enterprise IT management software, information management solutions and security intelligence/risk management services. Solutions are delivered in the form of traditional software licences or as software-as-a-service (SaaS). Mergers & Acquisitions The competitive and fast-changing nature of the technology markets HP serves means that it is often necessary to acquire competitive or complementary businesses in order to keep pace with change, add key products and technologies to the solutions portfolio and to arm itself with the patents and knowledge necessary to evolve its offerings in line with customer requirements. Since 2001, HP has completed 59 mergers or acquisitions, including the following key businesses: Compaq Computer Corporation (2001, gave HP a thriving personal computer © Business Monitor International Ltd Page 53 Israel Information Technology Report Q4 2012 business that has become the leading provider of PCs globally); StorageApps (2001, US$350mn, storage virtualisation solutions); Extreme Logic (2003, e-business solutions provider); Snapfish (2005, an online photo service); SPI Dynamics (2007, web application security assessment software); EDS (2008, US$13.9bn, IT and business process outsourcing technology); 3Com (2009, US$2.7bn, networking switching, routing and security solutions); Palm (2010, US$1.2bn, connected multimedia devices, including smartphones and a next generation operating system, webOS); 3PAR (2010, US$2.35bn, utility storage solutions and related technology); and, Autonomy Corporation (2011, US$276mn, enterprise infrastructure software). In August 2011, however, HP CEO, Leo Apotheker, announced a company transformation aimed at strengthening its capabilities in the enterprise sector and positioning it favourably for the shift away from discrete internal networking solutions to cloud-based models. A key part of this transformation was the discontinuation of webOS devices, specifically the Palm Pre family of smartphones and the TouchPad range of tablet computers, the first of which had only been launched less than two months earlier. It was also announced that HP would consider its options for the Personal Systems Group including, potentially, its complete disposal or a partial spin-off. The rationale behind these decisions was that margins for the PC business had been eroded to the point where HP could no longer afford to focus marketing and development costs yet still offer a quality product. Meanwhile, it was decided that the longterm costs of developing webOS for smartphones and tablets also outweighed the likely return on investment at a time when Google's Android had quickly come to dominate the market where there were already four high-profile OSs. In January 2012, HP decided to turn webOS to the open source developer community; it will still derive income from licensing the software. Investors and analysts who were already concerned that HP had overpaid for Palm in the first place and that the TouchPad had not been given sufficient time to establish itself in the nascent tablet market were alarmed by this turn of events. Many were also less than sanguine about the prospect of HP jettisoning its biggest division in terms of revenue, though, with Asian competitors forcing a price war in the PC segment, this was perhaps not surprising in retrospect. The announcement also coincided with the agreement to purchase Autonomy and came as many technology companies were buying rivals and peers for the patents they considered most useful in fending off competitors in the future; in this light, investors argued that HP was overpaying for Autonomy products and assets that might never deliver a return on investment. The muddled execution of these announcements and a lack of a definitive post-PSG strategy eventually cost Apotheker his job. He stepped down as CEO in late September 2011, less than a year after taking on the role. In that time, HP's share price halved in value. His successor is Meg Whitman, an HP director since January 2011. Under Whitman's leadership, HP has promised to consider retaining the PSG business and a lifeline, of sorts, has been © Business Monitor International Ltd Page 54 Israel Information Technology Report Q4 2012 extended to webOS as an open source platform that may yet form the heart of next generation consumer computing devices and services produced by HP or a partner company. However, the company's future strategy remained ill-defined at the time of writing and HP's share price continued to underperform its peers. Competition HP faces intense price- and feature-driven competition in all of its markets globally, but claims to be the largest company offering general purpose computers and personal information, imaging and printing products for industrial, scientific, business and consumer applications, and IT services. Competitors in the PSG sector include Dell, Acer, ASUSTeK Computer, Apple, Lenovo Group and Toshiba. In certain regions, HP also competes with local companies and generic 'white label' product manufacturers. The service businesses, including HP Enterprise Services and Technology Services, compete in IT support services, consulting and integration, infrastructure technology outsourcing, business process outsourcing and application services. The IT support services and consulting and integration markets are under significant pressure as customers are reducing their IT budgets. However, this trend has benefited HP's outsourcing businesses and customers look to lower IT management costs. Key competitors include IBM Global Services, Computer Sciences Corporation, Accenture, Fujitsu, Wipro, Infosys Technologies and Tata Consultancy Services. IPG's consumer, SME, graphics and enterprise customer segments saw competition from Canon USA, Lexmark International, Xerox Corporation, Seiko Epson Corporation, Samsung Electronics and Brother Industries. The ESSN group competes with broad solutions providers such as IBM as well as more focused competitors such as EMC Corporation and NetApp (storage) and Dell (servers). HP Software group markets enterprise IT management software in competition with IBM and BMC Software, among others. Its information management solutions compete with products from the likes of IBM, EMC and Symantec Corporation. It also delivers enterprise security/risk intelligent solutions that compete with offerings from Symantec, IBM, Cisco Systems and McAfee. Financial Performance For the financial year ended October 31 2011, HP recorded net revenue of US$127.2bn, up by almost 1% y-o-y. The Services division accounted for US$36.0bn and was up by around 1.2% y-o-y; the Technology Services and Applications Services segments grew fastest while the Business Process Outsourcing segment declined y-o-y. ESSN generated revenue of US$22.2bn in FY2011, up by around 9.3% y-o-y; in general, Networking and Storage revenue were up y-o-y while Industry Standard Servers revenue was down slightly and Business Critical Systems revenue was down sharply. HP Software revenue totalled US$3.2bn in FY2011, up by 18.0% y-o-y due to revenue growth in licences and services. PSG revenue totalled US$39.6bn in FY2011, down by 2.9% y-o-y; although commercial client revenue grew slightly, consumer client revenue was down markedly and total unit shipments grew by only 2% y-o-y, aided by price cutting. IPG revenue totalled US$25.8bn in FY2011, flat y-o-y as a © Business Monitor International Ltd Page 55 Israel Information Technology Report Q4 2012 decline in consumer printing revenue was matched by growth in commercial printer revenue. HP ended FY2011 with operating income of US$9.7bn, down by 15.7% y-o-y and the company's net profit amounted to US$7.0bn, down from US$8.8bn a year earlier as restructuring charges, the winding down of the webOS business, goodwill impairment and acquisition costs weighed on profit. Strategy HP states that its long-term strategy is focused on leveraging its portfolio of hardware, software and services as the company adapts to a changing/hybrid model of IT delivery and consumption driven by the growing adoption of cloud computing and increased demand for solutions. To successfully execute on this strategy, HP needs to continue to evolve its historically hardware-centric business model towards a model that includes more software and higher value services offerings. In addition, the company believes it needs to continue to further evolve the focus of its organisation towards the delivery of integrated IT solutions for its customers. The restructuring process announced in August 2011 created a great deal of uncertainty as investors raised concerns about plans to offload the largest revenue-generating business unit, PSG, the seemingly premature termination of the mobile devices business and a failure to move as decisively and as quickly as rivals Dell and Cisco in the storage and networking solutions markets towards a more cloud-centric business. Some of that uncertainty has evaporated after the decision was made to retain PSG for now and a promise was made to make more selective organic investments to drive longer-term profitable growth. Financial Data Net Revenue FY2009: US$114.552bn Net Revenue FY2010: US$126.033bn Net Revenue FY2011: US$127.245bn Services Revenue FY2010: US$35.529bn Services Revenue FY2011: US$35.954bn Enterprise Revenue FY2010: US$20.356bn Enterprise Revenue FY2011: US$22.241bn Software Revenue FY2010: US$2.729bn Software Revenue FY2011: US$3.217bn Personal Systems Revenue FY2010: US$40.471bn Personal Systems Revenue FY2011: US$39.574bn Imaging & Printing Revenue FY2010: US$25.764bn Imaging & Printing Revenue FY2011: US$25.783bn Operating Profit FY2009: US$10.136bn Operating Profit FY2010: US$11.479bn © Business Monitor International Ltd Page 56 Israel Information Technology Report Q4 2012 Operational Data Company Details Operating Profit FY2011: US$9.677bn Net Income FY2009: US$7.660bn Net Income FY2010: US$8.761bn Net Income FY2011: US$7.074bn PC Sales, Calendar 2009: 58.94mn (Gartner estimate) PC Sales, Calendar 2010: 62.77mn (Gartner estimate) Employees (October 2011): 349,600 Hewlett-Packard Company 3000 Hanover Street Palo Alto California 94304 United States +1 650 857 1501/ www.hp.com © Business Monitor International Ltd Page 57 Israel Information Technology Report Q4 2012 Matrix Global client base in more than 50 countries. Contracts with telecoms companies offer potential. Working with different industries. Weaknesses Reliance on government projects, which can waver with economic outlook. Opportunities International outlook allows for expansion of services. Israel is emerging as an IT hub, bringing attention to local companies. Israel's IT Market is highly competitive with several players. Strengths Threats Overview Matrix is the largest unit of the Formula Group, a company that was incorporated in 1985. Formula trades on the NASDAQ as FORTY and shareholders include Bank Leumi and Migdal. Matrix is one of Israel's leading systems integrators with software solutions and services core to its business. Matrix's ownership structure comprises interested party holdings (50.7%), institutional investors' holdings (15.32%) and free float (33.98%). 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. Financial Results In 2011, Matrix reported a 15% y-o-y increase in revenues to ILS1.758bn, driven by organic growth and acquisitions. Software sales grew 15.5% to ILS1.177bn. The company won several new contracts across its business areas including public, financial and pharmaceutical. The company highlighted increasing customer interest in areas such as nearshore and offshore for a number of industry verticals as many clients are interested in increasing efficiency and flexible business models. The market of software products generated ILS194.4mn, up 14%, while integration and computer infrastructure grew 19% to ILS261mn. Training and deployment gave the company ILS164mn, a 4.5% increase. Net profit in 2011 was a record ILS96.1mn, up 8.4%, having gained 30% in the final quarter of the year. Company Developments 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, Matrix reported continuing successes in 2009, with © Business Monitor International Ltd Page 58 Israel Information Technology Report Q4 2012 wins 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. The company also reported several new projects in Q109, including several financial sector implementations. The company credited its continued profitability in the face of the global economic slowdown to preparatory measures taken at the end of 2008. It cut operational expenses, including senior management salaries, and exercised what it described as 'extreme caution' in tenders. In 2008, Matrix reported tender wins in sectors including defence, communication and industrial. Specific successes included winning a ILS20mn project to implement a CRM system at long-time customer Bezeq, as well as a number of public sector CRM projects. In 2007 Matrix undertook the implementation of a pension consulting system for the Mizrahi Tefahot Bank, contracts based on the Matrix CRM system for three capital market companies and a large-scale integration project for the Airport Authority. Matrix also won a tender from the Ministry of Finance to make government forms available online. The project, which focused particularly on tax forms, cost around ILS2mn spread over two years, with the option of further expansion. Matrix is also focusing on the growing outsourcing market with government as well as corporate IT departments and has recently appointed a new sales and marketing manager for its Talpiot division. The division has a dedicated software development centre, with around 25 projects currently claimed to be under way. 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, operation sites for two banking institutions in Israel and abroad, channel infrastructure for a bank and significant interface and integration project for the capital market, establishment of back office and an interface project for two leading customers in the financial field and software for the central computer of a large financial institution. In the pharmaceutical industry there were multi-channel projects in the field of pharmaceuticals and finances, complete computerisation of yet another hospital abroad as well as public sector projects such as conversion of dozens of knowledge management sites for a government organisation, warehousing projects for large industrial companies and for the public sector and winning significant bids for training and deployment projects at the Ministry of Finance, in the public sector, financial institutions and the police. Financial Data Company Details Revenues (2010): ILS1.528bn Revenues (2011): ILS1.758mn Net Income (2010): ILS88.6mn Net Income (2011): ILS96.1mn Matrix © Business Monitor International Ltd Page 59 Israel Information Technology Report Q4 2012 3 Abba Eban Boulevard P O Box 2062 Herzlia Pituach 46120 Israel Tel: +972/(0) 9 959 8840 Fax: (0) 9 959 8844 www.matrix.co.il © Business Monitor International Ltd Page 60 Israel Information Technology Report Q4 2012 Microsoft Corporation Strengths Recent operating systems XP and Windows 7 have proved popular. Strong grip on the desktop application market, with Microsoft Office holding over 90% of the office software market. Weaknesses Microsoft has received criticism in the past for problems with anticompetitive practices, stability, security and compatibility. Late entrant to the smartphone OS market sees it lag behind rivals Apple and Google. Opportunities Despite its relatively late entrance to the gaming services industry, the Xbox has enjoyed rapid success. The Windows Phone OS may yet gain a new lease of life through deployment on next-generation phones from Nokia. Interconnectivity between Microsoft's many different products and services will allow the company to capitalise strongly on its substantial investment in cloud computing. Microsoft's acquisition of Skype will further this ambition. Threats Windows division experienced a 6% decrease in Q411 revenue as PC sales fell. The economic downturn is leading customers to delay the purchase of such devices Rival Google has had a head start in the cloud computing sphere, which may mean Microsoft may miss out as devices with lower processing power become more popular, such as tablets and e-readers. Overview Microsoft Corporation develops, manufactures, licenses and supports a wide range of computing services. It was founded in 1975, and became the dominant player in the home computer market in the 1980s through its MS-DOS operating system. This was succeeded by Microsoft Windows. It also created Microsoft Office, the dominant player in the Office software suite. Microsoft is divided into five product divisions: Windows & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division. Windows & Windows Live Division Windows & Windows Live Division develops and markets PC operating systems, related software and online services, and PC hardware products. This division focuses on software, hardware and services designed to improve efficiency through extended browsing capabilities and operations across the user's hardware and software. The Windows Division consists of multiple editions of the Windows operating system, software and services through Windows Live and Microsoft PC hardware products. Server And Tools This area develops and markets technology and related services, with the aim to improve productivity and efficiency. Products and services under this divisioninclude Windows Server, © Business Monitor International Ltd Page 61 Israel Information Technology Report Q4 2012 Microsoft SQL Server, Windows Azure, Visual Studio, System Centre products, Windows Embedded device platforms and Enterprise Services. Enterprise Services comprise Premier product support services and Microsoft Consulting Services. It also covers developer tools, training and certification. Around 50% of this segment's revenue comes from multi-year volume licensing agreements, 30% is purchased through transactional volume licensing programs, retail packaged product and licences sold to OEMs, and the remainder comes from Enterprise Services. Online Services Division (OSD) The OSD develops and markets information and content designed to help simplify tasks and improve utility of online services. It also helps advertisers connect with their target audiences. OSD products include Bing, MSN, adCenter and advertiser tools. Bing and MSN generate revenue through the sale of search and display advertising, which accounts for nearly 100% of OSD's annual revenue. Microsoft Business Division (MBD) This division is the development and marketing arm for software and online services designed to increase productivity in teams, organisations and on a personal level. MBD offerings include Microsoft Office (comprising mainly SharePoint, Exchange, Lync and Office 365), which generates over 90% of MBD revenue. The other 10% comprises Microsoft Dynamics business solutions. Revenue are divided into business revenue, which includes Microsoft Office system revenue, generated through volume licensing agreements and Microsoft Dynamics revenue, and consumer revenue, which includes revenue from retail packaged product sales and OEM revenue. Entertainment and Devices Division (EDD) This area focuses on the development and marketing of entertainment and connectivity services. EDD products include the Xbox 360 (which includes gaming and entertainment consoles, Kinect, Xbox 360 video games, Xbox LIVE, and accessories). It also includes Mediaroom IPTV software, Skype and Windows Phone. Microsoft acquired Skype on October 13 2011. In Q112, the EDD recorded 8.2mn consoles sold, an increase of 25% y-o-y. Xbox live subscribers came to 40mn, up 33% y-o-y and the Kinect reached an installed base of 18mn units. Skype registered 200mn users. Strategy The main pinnacle of Microsoft's strategy is to increase connectivity between its products and services. Its main strategy for 2012 is expanding cloud computing, Windows Phone and the launch of Windows 8. All these elements are interconnected, and will become increasingly so. Cloud Computing and Interconnectivity In April 2011, Microsoft announced it was to spend 90%, or US$8.64bn, of its R&D budget on developing cloud computing services. Microsoft's shift towards Software-as-a-Service (SaaS) is enabling applications and services that historically have been separate to become more integrated, working to connect PCs, phones, cameras, game consoles and video and music players through client software and high-speed internet services using a combination of © Business Monitor International Ltd Page 62 Israel Information Technology Report Q4 2012 Windows, Windows Live and Windows Phone OS. Windows Phone The Windows Phone was released in Europe, Singapore, Australia, New Zealand, the US, Canada and Mexico in H210 and in Asia in H111. Microsoft and Nokia formed a strategic partnership in February 2011 to build a global mobile ecosystem based on complementary assets. Microsoft would provide developer tools, making it easier for application developers to leverage Nokia's global scale while Nokia's application and content store would be integrated into Microsoft Marketplace. The Windows Phone will play a prominent role in Microsoft's 2012 strategy. In December 2011, it revealed it was investing in a range of exclusive apps for the device, incompatible with other smartphones. The company hopes this exclusivity will tempt users to switch phones, although it has struggled to secure a number of apps popular on iOS, which will leave it disadvantaged. Windows 8 There is also focus on Windows 8, the next version of the Windows Operating System. The beta version will be released in late February 2012. The company is aiming to have the product ready for general release in 2012, most likely Q312. Company History Microsoft was officially established on April 4 1975, by Paul Allen and Bill Gates, but entered the operating system business in 1980 with a version of Unix, called Xenix. They licensed this to hardware manufacturers such as Intel, Tandy and Altos. However, it was the DOS system that proved the key to Microsoft's success. In November 1980, IBM awarded a contract to Microsoft to provide a version of the system to be used in the upcoming IBM Personal Computer. While IBM rebranded the system PC-DOS, Microsoft retained ownership of the MS-DOS system, and it soon became the leading PC OS vendor. In 1984, the company released Microsoft Windows, a graphical extension for MS-DOS. In 1986, the company launched an IPO, which made 12,000 Microsoft employees instant millionaires. In 1990, the company launched the Microsoft Office suite, which joined Windows as being a dominant player in its field. However, this led to numerous legal wrangles, as Microsoft was accused of anticompetitive practices. As the internet began to gain popularity in 1995, the company expanded into computer networking and online services. This year saw the release of Windows 95, online service MSN and the web browser Internet Explorer, which set Microsoft as a pioneer in the internet era. The company moved into the video games market in 2001, with the release of the Xbox, providing a challenger to Sony and Nintendo in that market. In March 2004 the company was involved in an antitrust case against the EU which resulted in Microsoft paying EUR497mn for abuse of market dominance. The company was forced to produce new versions of Windows XP without Windows Media Player, Windows XP Home Edition N and Windows XP Professional N. Windows Vista and Microsoft 2007 were released in January 2007, which led to a record profit for Microsoft in that year. However, the legal wrangles continued and the company was fined © Business Monitor International Ltd Page 63 Israel Information Technology Report Q4 2012 an additional EUR899mn for lack of compliance with the 2004 ruling. Bill Gates stepped down as chief software architect in 2008, although continues to hold positions within the company to today. In 2008, the company launched its Azure Services Platform, its first foray into the cloud computing market. In 2010, it focused on reforming its operating system for mobile telephony, named Windows Phone OS, and refined its strategy for entering the smartphone industry. Financial Data Revenue (2008): US$61.981bn Revenue (2009): US$58.689bn Revenue (2010): US$66.69bn Revenue (2011): US$72.996bn Revenue (Q111): US$16.428bn Revenue (Q211): US$17.367bn Revenue (Q311): US$17.372bn Revenue (Q411): US$20.885bn Operating Profit (2008): US$21.912bn Operating Profit (2009): US$21.42bn Operating Profit (2010): US$26.384 Operating Profit (2011): US$28.571bn Operating Profit (Q111): US$5.709bn Operating Profit (Q211): US$6.171bn Operating Profit (Q311): US$7.203bn Operating Profit (Q411): US$7.994bn Net Income (Profit After Tax) (2008): US$17.232bn Net Income (2009): US$16.258bn Net Income (2010): US$20.568bn Net Income (2011): US$23.974bn Net Income (Q111):US$5.232bn Net Income (Q211): US$5.874bn Net Income (Q311): US$7.203bn Net Income (Q411): US$6.624bn Employees (2011): 90,000 *nb the above data is for the calendar year – Microsoft reports data according to its financial © Business Monitor International Ltd Page 64 Israel Information Technology Report Q4 2012 year which ends June 30. So FYQ112=Q311 Operational Data Company Details Consoles Sold (Q411): 8.2mn Xbox Live Subscribers (Q411): 40mn Skype Subscribers (Q411): 200mn Microsoft Corporation One Microsoft Way Redmond Washington United States WA 98052 Click here to enter text. www.microsoft.com © Business Monitor International Ltd Page 65 Israel Information Technology Report Q4 2012 Country Snapshot 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 key to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail Israel's population pyramid for 2011, the change in the structure of the population between 2011 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 66 Israel Information Technology Report Q4 2012 Table: Israel's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2012f 2015f 2020f 4,500 5,332 6,015 6,605 7,418 7,695 8,061 8,666 0-4 years 483 528 614 666 735 769 792 794 5-9 years 461 511 548 619 666 695 740 794 10-14 years 462 508 527 554 620 642 671 742 15-19 years 430 495 528 536 564 587 623 672 20-24 years 355 451 514 538 556 558 567 624 25-29 years 328 383 463 523 557 560 558 568 30-34 years 315 360 392 470 546 557 560 560 35-39 years 325 346 370 397 500 527 550 562 40-44 years 271 357 359 375 424 454 503 551 45-49 years 188 304 371 362 390 401 425 502 50-54 years 171 204 316 373 372 375 389 422 55-59 years 160 185 215 315 388 384 368 385 60-64 years 150 182 195 213 329 360 381 362 65-69 years 136 165 184 188 217 253 318 368 70-74 years 98 145 160 170 183 184 204 299 166 208 259 305 373 389 412 461 Total 75+ years f = BMI forecast. Source: World Bank, UN, BMI Table: Israel's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2012f 2015f 2020f 0-4 years 10.74 9.91 10.21 10.09 9.91 10.00 9.83 9.16 5-9 years 10.26 9.58 9.10 9.38 8.98 9.03 9.18 9.16 10-14 years 10.27 9.52 8.77 8.38 8.35 8.35 8.32 8.56 15-19 years 9.55 9.29 8.77 8.12 7.61 7.62 7.73 7.76 20-24 years 7.90 8.45 8.54 8.15 7.49 7.26 7.04 7.20 25-29 years 7.29 7.18 7.70 7.92 7.50 7.27 6.93 6.56 30-34 years 7.00 6.75 6.51 7.12 7.37 7.24 6.95 6.46 35-39 years 7.22 6.50 6.16 6.00 6.74 6.84 6.82 6.48 40-44 years 6.03 6.69 5.96 5.68 5.71 5.90 6.24 6.35 45-49 years 4.18 5.71 6.17 5.49 5.26 5.21 5.27 5.79 50-54 years 3.80 3.82 5.25 5.65 5.01 4.87 4.83 4.87 © Business Monitor International Ltd Page 67 Israel Information Technology Report Q4 2012 Table: Israel's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2012f 2015f 2020f 55-59 years 3.55 3.47 3.57 4.77 5.22 4.99 4.57 4.45 60-64 years 3.34 3.41 3.24 3.22 4.43 4.67 4.72 4.18 65-69 years 3.02 3.10 3.06 2.85 2.92 3.29 3.94 4.25 70-74 years 2.17 2.72 2.67 2.57 2.46 2.39 2.53 3.45 75+ years 3.70 3.91 4.31 4.62 5.03 5.06 5.11 5.32 f = BMI forecast. Source: World Bank, UN, BMI Table: Israel's Key Population Ratios, 1990-2020 Dependent ratio, % of total 1 working age Dependent population, total, 2 '000 1990 1995 2000 2005 2010 2012f 2015f 2020f 67.1 63.2 61.6 61.0 60.4 61.6 63.7 66.4 1,807 2,066 2,293 2,502 2,794 2,933 3,136 3,458 Active population, % of total 3 59.9 61.3 61.9 62.1 62.3 61.9 61.1 60.1 Active population, total, '000 4 2,693 3,267 3,722 4,102 4,625 4,761 4,925 5,209 52.2 47.4 45.4 44.8 43.7 44.2 44.7 44.7 1,407 1,547 1,689 1,839 2,021 2,107 2,203 2,330 Pensionable population, % of 7 total working age 14.8 15.9 16.2 16.2 16.7 17.4 19.0 21.7 Pensionable population, 8 '000 400 519 604 663 773 827 934 1,128 Youth population, % of total 5 working age Youth population, total, '000 6 1 2 3 f = BMI forecast; 0>15 plus 65+, as % of total working age population; 0>15 plus 65+; 15-64, as % of total 4 5 6 7 8 population; 15-64; 0>15, % of total working age population; 0>15; 65+, % of total working age population; 65+. Source: World Bank, UN, BMI Table: Israel's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2012 2015 2020 Urban population, % of total 90.4 90.9 91.4 91.6 91.8 91.9 92.0 92.2 Rural population, % of total 9.6 9.1 8.6 8.4 8.2 8.1 8.0 7.8 4,212.6 5,040.4 5,748.1 6,348.0 6,810.1 7,069.9 7,416.1 7,990.5 447.4 504.6 540.9 582.1 608.3 624.8 644.9 676.0 Urban population, '000 Rural population, '000 Source: World Bank, UN, BMI © Business Monitor International Ltd Page 68 Israel Information Technology Report Q4 2012 BMI Methodology How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, however, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. It must be remembered that human intervention plays a necessary and desirable part in all of our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. IT Industry Forecasts There are a number of criteria that drive our forecasts for each IT variable. IT forecasting is complicated due to the fragmented nature of the market, with little transparency of vendor data and low apparent agreement between many sets of figures in terms of market definition, base and methodology. In addition, forecasts are naturally affected by consideration of a variety of internal and external political and economic factors. © Business Monitor International Ltd Page 69 Israel Information Technology Report Q4 2012 Within best-practice techniques of time-series modelling, BMI’s quarterly updated forecasts are improved substantially by intimate knowledge of the prevailing features of each local market. Individual variables taken into account in creating each forecast include: 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 BMI’s own macroeconomic and demographic forecasts. IT Ratings – Methodology Our approach in BMI’s IT Business Environment Ratings is threefold. First, we seek accurately to capture the operational dangers to companies operating in this industry globally. Second, we attempt, where possible, to identify objective indicators that may serve as proxies for indicators that were traditionally evaluated on a subjective basis. Finally, we include aspects of BMI’s proprietary Country Risk Ratings (CRR) that are relevant to the IT industry. Overall, the ratings system, which integrates with those of all 16 industries covered by BMI, offers an industry-leading insight into the prospects/risks for companies across the globe. Ratings System Conceptually, the ratings system divides into two distinct areas: Limits of potential returns: Evaluation of sector’s size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. Risks to realisation of those returns: Evaluation of industry-specific dangers and those emanating from the state’s political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period. Indicators The following indicators have been used. Overall, the rating uses three subjectively measured indicators, and 41 separate indicators/datasets. © Business Monitor International Ltd Page 70 Israel Information Technology Report Q4 2012 Table: IT Business Environment Indicators Indicator Rationale Limits to potential returns Market structure IT market value, US$bn Sector value growth, % year-onyear (y-o-y) Denotes breadth of IT market. Large markets score higher than smaller ones Denotes sector dynamism. Scores based on annual average growth over five-year forecast period Government initiatives and spending Denotes spending boost provided by public sector, which can be a crucial determinant of sector development Hardware, % of total sales Denotes maturity of market. A high proportion of hardware sales – compared to services/software – indicates that the overall IT market is immature Country structure Urban-rural split GDP per capita, US$ Urbanisation is used as a proxy for development. Predominantly rural states therefore score lower A high GDP per capita supports long-term industry prospects. Overall score for country structure is also affected by the coverage of the power transmission network across the state Risks to potential returns Market risks Intellectual property (IP) laws ICT policy Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting Subjective evaluation of official policy towards IT development, as enshrined in statute and tax code Country risk Short-term external risk Rating from CRR evaluates the vulnerability to external shock, which is the principal cause of economic crises. Such a crisis would cut investment Short-term financial risk Rating from BMI’s CRR, to denote risk of currency crisis and stability of banking sector. The former would hit revenues in hard currency, while the latter would curtail investment funding Trade bureaucracy Legal framework Bureaucracy Corruption Rating from CRR to denote ease of trading with the state Rating from CRR denotes the strength of legal institutions in each state – security of investment can be a key risk in some emerging markets Rating from CRR denotes ease of conducting business in the state Rating from CRR denotes the risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete Source: BMI © Business Monitor International Ltd Page 71 Israel Information Technology Report Q4 2012 Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all subcomponents equal weight. Consequently, the following weight has been adopted. Table: Weighting Of Components Component Weighting Limits of potential returns 70% – IT market 65% – Country structure 35% Risks to realisation of potential returns 30% – Industry risks 40% – Country risk 60% Source: BMI Sources Additional sources used in IT reports include national ministries and ICT regulatory bodies, national industry associations, and international industry organisations such as the International Telecommunication Union (ITU), officially released company results and figures, and international and national industry news agencies. © Business Monitor International Ltd Page 72 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... should be made in the educational system for training information workers Aid to be given to the less wealthy to make them part of Israel' s information industry © Business Monitor International Ltd Page 30 Israel Information Technology Report Q4 2012 Industry Forecast BMI projects that the Israeli IT market will grow to a value of US$6.0bn in 2012, and the market is forecast to reach US$8.1bn in... Windows 8, should have a positive impact on 2012 sales despite business caution More © Business Monitor International Ltd Page 25 Israel Information Technology Report Q4 2012 than 50% of Israeli computer users are estimated to still be using the Windows XP operating system, and this represents a significant potential market, as support for XP will be withdrawn by 2014 2012 should, in any event, see a boost... and cloud computing, as companies focus on return on investment © Business Monitor International Ltd Page 19 Israel Information Technology Report Q4 2012 2012 should, however, see a boost from systems upgrades deferred from 2009 Migrations to the Windows 7 operating system and new Intel core technology could trigger a new cycle of hardware upgrades, although much will depend on business and consumer... Africa due to improved and lowercost bandwidth availability © Business Monitor International Ltd Page 21 Israel Information Technology Report Q4 2012 Market Overview Government Authority Government Authority Ministry of Science and Technology Minister Daniel Hershkowitz The Ministry of Science and Technology has undergone numerous name changes and received its current name following the election of Binyamin... 22 Israel Information Technology Report Q4 2012 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... expansion and development, rather © Business Monitor International Ltd Page 23 Israel Information Technology Report Q4 2012 than purely to realise cost efficiencies, but there should be growth areas However, lower average prices have meant that revenue growth in most segments has lagged shipments As the Israeli economy's growth cools in 2012, enterprises will remain cautious about capital spending, but there... to Israel Previously Israeli users of the iPad were obliged to pay for a less than optimal Hebrew keyboard application In August 2010, iDigital, the Israeli importer of the iPad, had announced the availability of the device for sale in Israel, but, as of October 2010, the cellular companies were still not offering the device The Israel © Business Monitor International Ltd Page 24 Israel Information Technology. .. emerging Chinese and Indian producers of high-tech goods and polished diamonds, as well as sluggish growth in the eurozone, could undermine demand for Israeli exports © Business Monitor International Ltd Page 10 Israel Information Technology Report Q4 2012 Israel Business Environment SWOT Strengths The business environment is supported by sound infrastructure and communication networks, as well as... International Ltd Page 28 Israel Information Technology Report Q4 2012 reduce poverty and achieve balanced growth The first track is expected to emerge as the main priority for the government The digital divide is both a symptom and an aggravator of relative poverty In May 2010, the Israeli Ministry of Finance launched a programme called 'Relative Advantage' to provide a boost to Israel' s high-tech sector... Business Monitor International Ltd Page 14 Israel Information In Technology Report Q4 2012 MEA IT Markets Over erview IT Penetration The Middle East region divide ides into two groups in terms of information ion society development In the first group oup are richer Internet Penetrat ation Per 100 Populati ation and more technologically adva dvanced countries, such as Israel and the th UAE, where internet