Israel Information Technology Report Q3 2009

Market Overview The Israeli IT market should have enough momentum from key sectors to expand over BMI's 2009-2013 forecast period despite the current economic slowdown. BMI projects that the local IT market will have an estimated value of US$4.9bn in 2009. The market is projected to grow at a compound annual growth rate (CAGR) of 6% over the forecast period to reach around US$6.3bn in 2013.

Following a deceleration in Q408, BMI believes that IT spending eased further in Q109 due to the economic slowdown. Several IT vendors reported a difficult quarter in Q109 as IT managers were looking to cut costs, and some projects were scaled back in key sectors for IT projects. Things may improve in H209, but rising job insecurity for those in work will have a negative impact on consumer sentiment.

However, the Israel IT market has a number of positive fundamentals which should keep it in positive territory. Spending by a number of key IT spending verticals such as defence, and financial services, should be to some extent insulated from the economic crisis. Low computer penetration, of around 30%, offers potential for continued growth.

Industry Developments In H109, Israel's high-tech sector suffered as demand for high-tech exports dropped by at least 10%-15%, with as many as 10,000 sector jobs feared to be at risk. This represented a major concern for the Israel government given that high-tech accounted for around 10% of Israel's economy, with annual sales estimated at around US$25bn. Major IT firms were retrenching in Israel, including SAP, Cisco and HP.

IT is viewed as an important policy tool for the Israeli government's 2008-2010 socioeconomic policy framework. The National Economic Council recently submitted a policy agenda to the government, which specified two main policy tracks of reducing poverty and achieving balanced growth. The first track is expected to emerge as the main priority.

As part of its modernisation agenda, the government is pressing ahead with various other strands of its egovernment project. Among other initiatives, there has also been spending on computers in healthcare and the nationwide paperless court initiative. The e-government programme is leading to increased demand for computers, with the Israeli government reaching a supply agreement in 2007 with Dell and HP.

Competitive Landscape Leading IT services vendors experienced mixed fortunes in H109. Matrix reported a good quarter in Q109 despite the deceleration in economic growth. Turnover was up to ILS375mn in that quarter from ILS326mn in the period of the previous year, representing growth of around 15%. Ness Israel, by contrast, reported a 15% decline in revenues for Q109, although two-thirds of this was due to currency translation.

In 2009, enterprise software giant Oracle was in discussion with Israel Credit Cards Cal (ICC-Cal) concerning the future of a major computerisation project being implemented by Oracle. Oracle initiated the project, to replace and upgrade ICC-Cal's computer systems, some eighteen months ago. However, differences had apparently arisen between Oracle and ICC-Cal concerning the project.

Meanwhile, in 2008, Oracle rival SAP reached an agreement with Ness to purchase the latter's SAP sales and distribution division in Israel. SAP will continue to work with Ness as a systems integrator, and in Q109 Ness completed an SAP-based ILS80mn billing and collection project for the Tel Aviv Jaffa municipality.

Computer Sales Computer sales in Israel including servers and accessories are projected at an estimated US$1.91bn in 2009, up slightly from US$1.85bn in 2008. The market is expected to grow at a CAGR of 6% over 2009- 2013 to reach US$2.4bn in 2013. Despite the economic slowdown, PC sales continued to grow in 2008 with stronger-than-expected spending in both enterprise and household sectors.

However, BMI believes that growth will be slower in 2009 with an economic slowdown and unemployment hitting consumer demand for high-tech goods. One area of growth will be lower-priced netbooks which are establishing a position in the market.

Software Israel software spending is projected at US$985mn in 2009, up from US$965mn in 2007. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period. A slowdown is expected in 2009, with companies deferring investments, or looking for good enough solutions to immediate problems. However, there should still be several growth areas.

Spending on software is shifting towards the small- and medium-sized enterprise (SME) segment, which forms the mainstay of the Israeli business sector. Spending on enterprise solutions has grown since 2007, with reviving or emerging areas of opportunity including security, Customer relationship management (CRM) solutions and business intelligence. In terms of verticals, the financial sector has been a mainstay of demand, with other key opportunities including defence and healthcare.

IT Services The IT services sector is projected to have a value of US$1.6bn in 2009, and this is expected to grow at a CAGR of 7% over the forecast period to reach US$21bn in 2013. In H109, there were reports of IT managers scaling back projects, and vendors will have to adapt to an environment where some projects are commissioned more in response to immediate needs.

Government and Defence are two key sectors likely to be a continued source of opportunities, because the factors driving spending in each case are not particularly sensitive to economic downturn. Another key area of opportunity is healthcare IT. Despite failing to capitalise in the past, Israel is starting to emerge as a desirable location for packaged applications and localisation services.

E-Readiness At end-2008, Israel had an estimated 4.5 million internet users, representing a penetration rate of 61.9% of the population. Israel's high PC penetration and the growing availability of broadband access mean that internet penetration is likely to continue its upward trajectory. Broadband penetration was estimated at 22.6%, or 1.6mn accounts. The government has announced that it intends to make a big effort to narrow the digital gaps that manifest themselves across various demographic lines.

Israel's strong broadband growth has long relied on a handful of developments across the market. These include the competition between Bezeq and the cable companies, with five major internet service providers (ISPs) vying for market share from both the corporate and residential markets, which enjoy high PC penetration rates, advanced telecoms infrastructure and minimal regulatory intervention. Another development likely to stimulate growth is the introduction of local loop unbundling (LLU), which will give alternative operators access to Bezeq's network and will stimulate much greater competition. LLU is due to be implemented by end-2009.