Israel Information Technology Report Q2 2009

Market Overview Despite an anticipated slowdown in 2009, the Israeli IT market should have enough momentum from key sectors to continue to expand over BMI’s 2008-2013 forecast period. This report estimates that the local IT market reached an estimated value of US$4.83bn in 2008. The market is forecast to grow at a CAGR of 6% over the forecast period, to reach a projected US$6.5bn in 2013.

IT spending still grew in H108 with stronger-than-expected demand from both enterprise and household sectors. However, following a deterioration in H208, BMI believes that growth will ease further in 2009 thanks to the economic slowdown. Rising unemployment, and job insecurity for those in work, will have a negative impact on consumer sentiment, while many companies facing tight credit conditions will likely cut back on IT budgets.

The Israel IT market has a number of positive fundamentals, which should keep it in positive territory.

Low computer penetration, of around 30%, offers potential for continued growth. High internet penetration and growing broadband penetration are drivers for the retail segment, along with interest in multimedia and mobile computing applications, and the new popularity of netbooks.

Industry Developments Israel’s high-tech merger activity fell in 2008, as a result of the downturn in the global economy.

According to figures from Israel’s Venture Capital Research Centre (JVC), the value of Israel high-tech mergers were down 19% year-on-year (y-o-y) to US$2.64bn. The average deal size was also down, to around US$31mn. The whole year passed without a single high-tech IPO, a first since 2003.

IT is viewed as an important policy tool for the Israeli government’s 2008-2010 socio-economic 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 Israel’s leading IT services vendors reported continued growth in 2008, despite the economic crisis. Ness Israel reported revenues, with18.7% top-line growth, year-on-year, to a record US$664.8mn. Ness’s defence and homeland security business performed particularly well. Meanwhile, Matrix also chalked up a number of successes in 2008, including winning a ILS20mn project to implement a CRM system at long-time customer Bezeq, and a number of public-sector CRM projects.

In 2008, SAP reached an agreement with Ness to purchase the latter’s SAP sales and distribution division in Israel. The move paralleled the acquisition by SAP, at the end of 2007, of partner SAP Arabia’s software licences and customer maintenance products. SAP implementations are a major IT services category in Israel, and SAP aims to be closer to its customers and partners.

As a result of the economic slowdown, HP announced in March 2009 that it was shutting down several wide digital printer production lines at its HP Indigo plant in Kiryat Gat. However, IBM Global Services announced in 2008 that it was establishing a new systems and technology group lab in Israel. Meanwhile, computer vendor Dell reportedly accepted an invitation to establish a new R&D and business centre in Jerusalem.

Computer Sales Computer sales in Israel including servers and accessories were valued at an estimated US$1.85bn in 2008, up from US$1.68bn in 2007. The market is forecast to grow at a CAGR of 6% over the 2008-2013 forecast period to reach close to US$2.5bn in 2013. Despite the economic slowdown, PC sales continued to grow in H108 with stronger-than-expected spending in both enterprise and household sectors. The PC market is expected to slow in 2009 as a result of declining consumer and business sentiment, but one area of growth will be lower-priced netbooks which are establishing a position in the market.

Software Israel software spending was estimated at US$309mn in 2008, up from US$255mn in 2007. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period.

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, CRM solutions and business intelligence. In terms of verticals, the financial sector has been a mainstay of demand, with other key areas including defence and healthcare.

IT Services The IT Services sector had an estimated value of US$1.54bn in 2008, and this is expected to grow at a CAGR of 8.6% over the forecast period to reach US$2.34bn in 2013. The number of new projects is expected to be reduced in 2009 thanks to the anticipated economic slowdown. 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. 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. Despite failing to capitalise in the past, the country is starting to emerge as a desirable location for packaged applications and localisation services.

E-Readiness At the end of 2008, Israel had an estimated 4.5mn internet users, representing a penetration rate of 61.9% of the population. 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.