Israel Information Technology Report Q2 2008

Market Overview The Israeli IT market should have enough momentum to continue growing robustly over BMI's 2008- 2012 forecast period, despite a likely slowdown in overall economic growth to around 2-3%. Due to the international situation, projections are not as upbeat as the start of last year, but BMI estimates that the local IT market will continue to grow at a compound annual growth rate (CAGR) of around 7% for the next few years. IT spending reached an estimated value of US$4.4bn in 2007.

Nearly 50% of Israeli IT spending is accounted for by major government and military sector projects which are unlikely to be affected by short term economic factors. Indeed the government will likely up its own consumption levels in a bid to prop up the economy. Israel's IT market is also benefiting from a growing demand for major IT outsourcing solutions. Government IT and digital divide initiatives are also important drivers of opportunity for vendors, while investments by financial sector organisations are on the rise.

Consumers and enterprises are also increasing outlay on IT. Computer sales were notably buoyant in 2007, with the positive economic situation and low interest rights prompting higher than projected spending. High internet penetration and growing broadband penetration remain further strong drivers for the retail segment, with growing interest in multimedia and mobile computing applications.

Competitive Landscape The most eagerly sought opportunities for vendors are in IT services, where the top three vendors, Israeli companies Ness Technologies and Matrix, and US giant IBM, have at least one third of the market.

Despite global ambitions, Israel remains an important market for domestic IT services companies and typically accounts for 40% -50% of revenues.

In Q108, Ness Technologies has already won a contract from Israel's Ministry of Construction and Housing valued at US$7mn. Under the contract, Ness will develop and operate a new system for managing housing assistance programmes. Meanwhile, fellow Israeli IT giant Matrix also saw a revenues rise of more than 10% in 2007 and reported a number of successes, including the implementation of a pension consulting system for the Mizrahi Tefahot Bank.

Industry Developments Recently released figures underline that Information Technology represents a crucial part of Israel's economy. The Israeli Association of Electronics and Software Industries (IAESI) projects that this sector will generate US$32bn annually by the end of the decade. According to recent figures, electronics and software exports had already reached US$18.7bn in 2006. The government is hoping that high-tech will generate US$30bn for the nation's economy by 2010.

The government is pressing ahead with other strands of its e-government projects. The 2005-2007 master plan of the government's ERP project called for implementation in around ninety government units by the end of last year.

Meanwhile, with defence concerns remaining at the top of the national agenda, the Israeli Airforce recently purchased simulation software from Presgis to support development of its new Flight and System Trainer for the F-161 aircraft.

Computer Sales Computer sales in Israel (including servers and accessories) are forecast at US$1.64bn for 2007, up from US$1.58bn in 2006. The market is expected to grow at a CAGR of 6% over the 2007-2012 forecast period, to around US$2.2bn by 2012. Computer sales grew strongly in the first three quarters of 2007.

Growth is being driven by a generally buoyant economy and is encouraging buoyant retail sales, with as many as 10% of Israelis expected to purchase a computer in 2007.

In 2007 desktop sales were reported to be far outstripping those of notebooks by 3:1. This reflects the fact that despite strong growth in demand for notebooks, the desktop sector is still unsaturated. PC penetration was only 26.4% in 2005, while digital divide issues mean that Israel currently has 600,000 children living below the poverty line, only 3% of whom have internet or home PC access, compared with 90% in the top income group.

Software Spending on packaged software in 2007 was estimated to be US$888mn, up from US$772mn in 2006.

The packaged software segment is expected to grow at a CAGR of around 8% over the forecast period.

Spending on software is shifting towards the small-medium enterprise (SME) segment. Increased IT budgets were meaning increased spending on enterprise solutions in 2007.

Reviving or emerging areas of opportunity include security solutions, customer relationship management (CRM) solutions, as well as business intelligence management. A survey of IT managers suggested that areas of high demand in 2007 would include management of Microsoft systems and servers, as well as systems management, basic data management, firewalls, enterprise resource planning (ERP) implementation and CRM. In terms of verticals, the financial sector is important, with other areas to watch including defence and healthcare.

sector will generate US$32bn annually by the end of the decade. According to recent figures, electronics and software exports had already reached US$18.7bn in 2006. The government is hoping that high-tech will generate US$30bn for the nation's economy by 2010.

The government is pressing ahead with other strands of its e-government projects. The 2005-2007 master plan of the government's ERP project called for implementation in around ninety government units by the end of last year.

Meanwhile, with defence concerns remaining at the top of the national agenda, the Israeli Airforce recently purchased simulation software from Presgis to support development of its new Flight and System Trainer for the F-161 aircraft.

Computer Sales Computer sales in Israel (including servers and accessories) are forecast at US$1.64bn for 2007, up from US$1.58bn in 2006. The market is expected to grow at a CAGR of 6% over the 2007-2012 forecast period, to around US$2.2bn by 2012. Computer sales grew strongly in the first three quarters of 2007.

Growth is being driven by a generally buoyant economy and is encouraging buoyant retail sales, with as many as 10% of Israelis expected to purchase a computer in 2007.

In 2007 desktop sales were reported to be far outstripping those of notebooks by 3:1. This reflects the fact that despite strong growth in demand for notebooks, the desktop sector is still unsaturated. PC penetration was only 26.4% in 2005, while digital divide issues mean that Israel currently has 600,000 children living below the poverty line, only 3% of whom have internet or home PC access, compared with 90% in the top income group.

Software Spending on packaged software in 2007 was estimated to be US$888mn, up from US$772mn in 2006.

The packaged software segment is expected to grow at a CAGR of around 8% over the forecast period.

Spending on software is shifting towards the small-medium enterprise (SME) segment. Increased IT budgets were meaning increased spending on enterprise solutions in 2007.

Reviving or emerging areas of opportunity include security solutions, customer relationship management (CRM) solutions, as well as business intelligence management. A survey of IT managers suggested that areas of high demand in 2007 would include management of Microsoft systems and servers, as well as systems management, basic data management, firewalls, enterprise resource planning (ERP) implementation and CRM. In terms of verticals, the financial sector is important, with other areas to watch including defence and healthcare.