Israel information technology report q1 2014

... training information workers © Business Monitor International Page 45 Israel Information Technology Report Q1 2014 ■ Aid to be given to the less wealthy to make them part of Israel' s information. .. International Page 18 Israel Information Technology Report Q1 2014 Macroeconomic Forecasts Economic Analysis BMI View: We project real GDP growth in Israel of 3.5% and 3.2% in 2013 and 2014, respectively... Page 20 Israel Information Technology Report Q1 2014 Confidence Unlikely To Rebound Israel - Bank Hapoalim Consumer Confidence Index, % chg y-o-y (RHS) Source: BMI, Bank Hapoalim The Israeli

Q1 2014 www.businessmonitor.com

ISRAEL

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Report Q1 2014

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2013

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BMI Industry View 7

SWOT 8

IT SWOT 8

Wireline 10

Business Environment 11

Political 12

Economic 13

Industry Forecast 14

IT Market 14

Table: Israel IT Industry - Historical Data And Forecasts (ILSmn) 14

Macroeconomic Forecasts 19

Economic Analysis 19

Table: Israel - Economic Activity 24

Industry Risk Reward Ratings 25

Table: MEA IT RRR - Q1 2014 27

Market Overview 29

Hardware 29

Software 34

Services 39

Industry Trends And Developments 43

Regulatory Development 47

Table: IT Regulatory Authorities 47

Table: Government Initiatives 50

Competitive Landscape 51

International Companies 51

Table: Intel 51

Local Companies 52

Table: Amdocs 52

Table: Check Point 53

Table: Imperva 54

Company Profile 55

Ness 55

Matrix 60

Regional Overview 64

Demographic Forecast 69

Demographic Outlook 69

Table: Israel's Population By Age Group, 1990-2020 ('000) 70

Table: Israel's Population By Age Group, 1990-2020 (% of total) 72

Table: Israel's Key Population Ratios, 1990-2020 73

Table: Israel's Rural/Urban Population Split, 1990-2020 73

Methodology 74

Industry Forecast Methodology 74

Sources 75

Risk Reward Rating Methodology 76

Table: It Risk Reward Rating Indicators 77

Table: Weighting Of Components 78

BMI Industry View

BMI View: Israel's IT market is the most developed in the Middle East with a well developed ecosystem of

major global investors, start-ups and universities engaged in cutting edge research These features

compensate for the relatively small and mature market that means growth rates are below those of many other MEA markets We estimate IT spending reached ILS22.6bn in 2013, with relatively stronger growth in software and services We believe IT spending will remain on a positive trajectory in 2014 and over the medium term The market will increasingly be driven by software and services in key sectors such as government, defence and financial services - resulting in IT services accounting for 36.4% of the overall market spending by 2017

Headline Expenditure Projections

Computer Hardware Sales: ILS9.56bn in 2012 to ILS9.55bn in 2013, down 0.1% in local currency terms.

Slow growth in incomes has dampened demand in the retail market, but this has been partially compensatedfor by Israeli businesses investing more to facilitate expansion

Software Sales: ILS5.0bn in 2012 to ILS5.1bn in 2013, an increase of 2.3% y-o-y Enterprise software

spending will be the main growth driver as device and data proliferation will result in increased spending oncustomer relationship management (CRM), databases and business intelligence

IT Services Sales: We expect IT services sales will outperform the rest of the IT market, increasing from

ILS7.73bn in 2012 to ILS7.90bnin 2013 Cyber security services will outperform in terms of growth, but itwill be stable sectors such as government and defence that continue to account for the majority of spending

Key Trends & Developments

■ The PC market in Israel has been negatively impacted by the weak economic environment and the shift inconsumption to tablets Notebook volumes have declined as consumers opt for relatively cheap tablets,helping to sustain volumes, but squeezing market value These trends will continue to squeeze the marketbut we identify medium term opportunities unlocked by the launch of Windows 8 operating system andthe potential for innovation in multi-use hybrid/convertibles to blend productivity and consumption usecases

■ The IT services market is expected to outperform software and hardware - with demand for cloud

computing, outsourcing and security services driving growth Cyber security threats have become moreprominent in the consciences of government and enterprises, and we expect spending to increasemarkedly over the short-to-medium term Meanwhile, banking and retail will be key verticals driving thegrowth of the cloud computing market as they seek cost savings, and look to increase flexibility

IT SWOT

SWOT Analysis

Strengths ■ Home to the most well developed economy and IT market in the region with major

local IT companies based in the country, a highly educated, linguistically skilledworkforce, and relatively low labour costs compared with developed markets

■ Strong defence and government spending provides base for IT demand

■ Strong political support, with the government having implemented many policies toaid in the development, success and expansion of the IT sector

■ Investment in FTTH and wireless data networks provide basis for cloud computinggrowth and internet of things expansion

Weaknesses ■ The recession at the beginning of the 2000s focussed customers on the bottom line,

with enhanced services and customer market power adding to pressure on pricingand margins

■ Digital divide, with just 3% of bottom-income group having home internet access

Opportunities ■ Cyber security threats should attract increased spending on safeguards as the

concerns of government and enterprises escalate

■ Growing demand for tablets and other mobile computing devices such as hybrids andultrabooks

■ Despite the financial crisis, the financial services sector, which accounts for around15% of spending, will have to spend on compliance with new Israeli SecuritiesAuthority regulations, introduced in the wake of the economic crisis

■ Defence and government projects should be less sensitive to fiscal retrenchment,with a major Savings and Insurance Exchange project rolled out by the Ministry ofFinance in 2013

SWOT Analysis - Continued

■ Outsourcing, Software-as-a-Service (SaaS) and applications management likely togrow fastest out of IT services, with particular opportunities in financial sector

■ Opportunities for partnership/investment in Israel's lively local IT company sector

Threats ■ 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 growthand put pressure on margins

SWOT Analysis

Strengths ■ Well developed internet/broadband sector compared with regional peers

■ Fixed-line liberalisation has led to increased competition and the erosion ofincumbent market share

■ Incumbent operator Bezeq faces strong completion from HOT Telecom, which hasrecently entered the mobile market

Weaknesses ■ Internet infrastructure is currently controlled by Bezeq and HOT Telecom

■ Regulator has been slow to license new services, eg WiMAX wireless broadband

■ VoIP licensing and triple-play for Bezeq placed on hold could hinder prospects

Opportunities ■ Introduction of LLU will give alternative operators access to Bezeq's network and

should stimulate much greater competition

■ Regulator is proposing a 76% reduction in fixed line interconnection fees; this couldstimulate increased service usage

■ The ViaEurpoa-led consortium building a fibre network over the Israel ElectricCorporation (IEC) infrastructure would provide competition for Bezeq and HOT, andultimately boost growth in the market

Threats ■ Continued reduction of internet tariffs could have devastating effect on revenues

■ Fixed broadband growth is slowing as mobile broadband services becomeincreasingly popular

■ Operators, Bezeq in particular, have resisted the introduction of number portability,which could lead to a price war and thus drive down mobile revenues

Business Environment

SWOT Analysis

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 widerange 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 foreigninvestment in the high-tech sector

Opportunities ■ 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 in 2011,

and could regain strength in 2013 and 2014

■ The parliament approved a plan to increase the country's oil and gas royalties, whichcould reduce energy profits in the future

SWOT Analysis

Strengths ■ Despite corruption allegations against some officials and members of parliament,

government members are still some of the most accountable in the region

■ Elections are for the most part free and transparent, ensuring that a broad spectrum

of political views is represented within government

Weaknesses ■ The protracted conflict with the Palestinians means there are persistent security risks

Strategies to minimise or end the conflict are domestically divisive, with tensionsbetween Israel and Hamas set to remain elevated

■ Frequent change to the composition of the coalition government often leads topolicies becoming fragmented or significantly diluted

■ With the civil war in Syria intensifying, risks of a spill over into Israel are increasing

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 Despite ongoing peace talks, finding a lastingsolution continues to pose a dilemma for Israel

■ Continued home-building in some West Bank settlements antagonises thePalestinians and stands in the way of the peace process

■ Iranian President Mahmoud Ahmadinejad's refusal to give up his country's nuclearprogramme raises concerns that an open military conflict between Israel and theIslamic republic could erupt in the second half of 2013

SWOT Analysis

Strengths ■ The policy framework has stabilised in recent years, and recent austerity measures

will help to keep the fiscal deficit under control over the coming years

■ The workforce is highly educated and skilled

■ The country's close ties with the US provide it with substantial financial assistance foreconomic and military ends

Weaknesses ■ The main downside risk to the economy is the security situation A sharp deterioration

can have an immediate impact on domestic confidence, tourism receipts, theexchange rate and foreign investment

■ The economy is highly exposed to that of the US and Europe in terms of exports andinvestment

Opportunities ■ In the long term, relatively elevated levels of employment will underpin private

Threats ■ Appreciatory pressures on the Israeli shekel risk damaging the country's exports That

said, risks will remain contained by the Bank of Israel's commitment to intervene inthe forex market to stem excessive appreciation of the unit

■ Competition from emerging Chinese and Indian producers of high-tech goods andpolished diamonds, as well as sluggish growth in the eurozone, could underminedemand for Israeli exports

e/f = BMI estimate/forecast Source: BMI

We continue to hold the view that the Israeli IT market will experience only limited growth over themedium term and will decline as a percentage of GDP This is a product of uncertainty in the domestic andglobal economy, saturation of the hardware and software/services market and price competition betweenvendors, which will hold down the overall value of the market

We believe the IT market reached a value of ILS22.3bn in 2012, equal to around US$5.7bn Our lowerexpectations of growth in 2012 and 2013 have caused the decrease in our forecasts, although the latter yearssee little change to overall growth expectations Israel remains a robust IT market with plenty of

development across industrial, government, defence and financial services spending

Our five-year CAGR sees growth around 5.2% in Israeli new shekel terms for the period from 2013-2017

We expect IT services will be the fastest growing segment of the IT market, narrowly ahead of software,with both growing fast relative to hardware In terms of key verticals, the financial services sector isimportant, boosted by compliance requirements with the new regulations introduced in the wake of theeconomic crisis in 2008-2009 Defence and government will remain key in the market's sustained

importance to the overall economy, with security an important source of growth The nature of sales willchange however as business becomes increasingly important and the hardware segment contributes

comparatively less to the market's overall growth Given Israel's relatively rich tech skills resource base,many organisations prefer to conduct software development in-house

2013 Outlook

Despite a slight improvement in the rate of real GDP growth from 2012 to 2013, BMI forecasts a slowdown

in spending growth in 2013 to 1.1% The downward revision to the Israeli market forecast is in part due tothe risk of a further escalation of hostilities between Israel and Gaza Meanwhile, the Israeli economycontinues to cool and sluggish external demand and weaker consumer spending are likely to weigh onheadline growth throughout the year The government is set to rein in spending, while leading indicator datapaint a relatively negative picture for private consumption and fixed investment

Although we expect the overall growth rate for the Israeli market to slow in 2013 there will nonetheless be

opportunities for vendors One such opportunity is in the provision of cyber and information

security products and services This is a growth area in IT markets globally, but there is a particularly largeopportunity in Israel where regional political tensions and the uptick in cyber attacks in 2012, affectingIsrael, UAE and Saudi Arabia, have concentrated the minds of government and enterprise decision makers

on investments to protect their IT systems

Other areas we expect to see growth include business intelligence and cloud computing, with the latterlikely to gain traction among SMEs as a lower cost alternative to bespoke systems Meanwhile sales ofhardware and software will receive a boost from Windows-8 driven upgrades and computer purchasespreviously delayed as a result of the economic situation The move to mobility and new form factors such astablets, hybrids and ultrabooks will help to drive demand in the consumer segment, while to some extentundermining demand for traditional notebooks

Meanwhile, despite the challenging trading conditions, vendors have reported a continued flow of ITprojects, with large tenders from the Israeli Ministries of Finance and Defence and the Israel ElectricCompany Following the global financial crisis, vendors reported demand had revived in the key financialservices vertical, with new projects including an US$11mn IT outsourcing tender by the First InternationalBank of Israel Healthcare, the public sector and utilities were also generating new projects or significantcontract extensions

Migrations to Microsoft's Windows 8 operating system could trigger a new cycle of hardware upgrades in

2013, although much will depend on business and consumer confidence A substantial share of Israelicomputer users are estimated to still be using the Windows XP operating system Windows 8 could also fuelthe ultrabook market as tablet makers leverage its capabilities to offer devices with touch screens andconvertible designs

Market Drivers

The Israeli IT market has several supportive fundamentals that should keep it in positive territory during

BMI's five-year forecast period to 2017 Although household computer penetration of around 75% offers

only limited potential for growth derived from first time buyers, there are several factors pushing multipledevice ownership Innovation in form factors, including tablets and hybrids will push sales of personaldevices Meanwhile, investments by telecoms operators to expand the reach of high capacity wireless andwireline broadband services will catalyse demand for personal devices Spending will continue to moveaway from desktops as more consumers acquire personal devices such as tablets - which may also cut intospending on notebooks

Per capita IT spending is expected to rise from ILS2,965 in 2013 to ILS3,459 by 2017 However, spendingwill fail to keep pace with GDP growth in Israel as the economy becomes less heavily weighted towards thehigh-tech sector following gas exploration and growth in other sectors Some key IT spending verticals willhowever keep pace, for instance defence and financial services, which are somewhat insulated from

economic vicissitudes Vendors will target projects across a range of sectors from government to financialservices, telecoms and utilities Regulatory compliance will continue to necessitate IT spending by banksand 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 arelatively low sensitivity to economic downturn compared with the commercial sector Government IT anddigital-divide initiatives are important sources of opportunity for vendors, with recent projects ranging fromgovernment e-services portals to healthcare The government remains determined to preserve the country'sstatus 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 byfinancial sector organisations should mean more large outsourcing deals Other sectors of opportunity willinclude healthcare and telecoms, as well as infrastructure, transport and the small office and home officesector

BMI expects IT services will display the highest

growth over the forecast period to 2017, due to

growth in key verticals and the opportunities

presented by cloud computing, big data analytics and

real-time enterprise services based on the internet of

things In addition, 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

As noted, cloud computing is expected to be a source of revenue growth over the medium term as

organisations looking for efficiencies turn to Software-as-a-Service and Infrastructure-as-a-Service

Particular areas of opportunity for cloud computing include banking and retailing, as organisations in thosefields look to save money on hardware

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 supportand service infrastructures Cloud computing is a field which could gain traction with SMEs as the on-demand model fits well with their smaller budgets and lack of demand for bespoke in-house solutions andsoftware

Summary

The Israeli economy remains vulnerable to global economic headwinds, with an escalation of risk

particularly around events in the eurozone Despite these storm clouds BMI believes IT spending has

Industry Trends - IT Market

2010-2017

e/f = BMI estimate/forecast Source: BMI

sufficient strength in key demand verticals to maintain a positive trajectory over the medium term.

However, we do not expect growth to keep pace with GDP as market saturation and price competitionbetween vendors limit increases in the total value of the market The hardware market is forecast to growfrom ILS9.6bn in 2013 to ILS11.2bn in 2017, with PC sales projected to rise from an estimated ILS7.9bn toILS9.3bn While growth will remain strong, the market will be increasingly dominated by IT service salesand software sales, indicating the maturity of the market

Macroeconomic Forecasts

Economic Analysis

BMI View: We project real GDP growth in Israel of 3.5% and 3.2% in 2013 and 2014, respectively The

domestic economy will remain in a soft patch, with austerity measures hitting private consumption, while weak growth in export markets will hinder the country's external position Risks to the outlook are lying firmly to the downside, as a result of the potential for an escalation of the civil war in neighbouring Syria.

We forecast real GDP in Israel to expand by 3.5% and 3.2% in 2013 and 2014, respectively, compared togrowth of 3.2% in 2012 The acceleration in growth this year will be mainly triggered by the beginning ofnatural gas production in the Tamar gas field, which will significantly reduce the country's import bill Thatsaid, we reaffirm our view that the economy will remain in a soft patch, with export growth remaining slack

as a result of slow growth in key export markets, while fiscal austerity will hit consumer demand in H213and 2014

Our medium-term outlook is more optimistic We expect real GDP growth to average 4.0% per annum overthe 2013-17 period Accelerating real GDP growth in the US and the eurozone from 2014 onwards, coupledwith the beginning of LNG exports from the Tamar field in 2014, will contribute to increasing exports,which will in turn support growth in fixed capital formation and private consumption

Brighter Medium-Term Outlook

Israel - Components Of GDP (ILSbn) & Real GDP Growth, % chg y-o-y

Source: BMI, Central Bureau of Statistics Israel F= BMI Forecasts.

Private Consumption Outlook

Private consumption grew 2.8% y-o-y in seasonally adjusted terms in Q113 According to reports,

consumption demand expanded at a rapid clip in Q213, driven by consumers purchasing large-ticket itemssuch as cars and houses ahead of a 1 percentage point increase in the value-added-tax to 18.0% in June.While the inflationary environment will continue to support household spending - we forecast headlineconsumer price inflation averaging 1.9% this year, only slightly higher than 1.7% in 2012 - we believe thatprivate consumption growth will decline over the coming quarters

Confidence Unlikely To Rebound

Israel - Bank Hapoalim Consumer Confidence Index, % chg y-o-y (RHS)

Source: BMI, Bank Hapoalim

The Israeli parliament approved the government's 2013-2014 budget on July 30 - including plans to cutexpenditure and raise taxes in order to rein in the country's burgeoning fiscal deficit - which will hit

consumer demand (see 'Austerity Measures Hitting Domestic Consumption', May 14) Moreover, the

unemployment rate rose to 6.9% in Q213, from 6.6% in Q113, and we expect the rate to remain relativelyelevated as a result of slow growth in the domestic economy We forecast private consumption expanding3.5% and 2.5% in 2013 and 2014, respectively

Government Spending Outlook

Government consumption growth increased 1.5% y-o-y in Q113, compared to quarterly average growth of3.0% in 2012 Given that the 2013-14 budget includes significant cuts to public services, governmentconsumption will remain relatively subdued over the coming quarters For instance, significant cuts on childbenefits, day care discounts and low-cost housing will be imposed on the ultra-Hortodox Jewish

community, and funding for yeshiva - an educational institution which focuses on the study of traditional

religious texts - will be cut by nearly half We forecast government consumption expanding 3.0% and 1.7%

in 2013 and 2014, respectively

Elevated Deficit Imposing Austerity Measures

Israel - Government Revenues & Expenditure, Budget Balance

Revenues, ILSbn (LHS) Expenditure, ILSbn (LHS) Budget balance, % of GDP (RHS)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0

50 100 150 200 250 300 350 400

-5 -4 -3 -2 -1

Source: BMI, Israel Ministry of Finance F=BMI Forecasts

Fixed Investment Outlook

Fixed capital formation declined 9.8% y-o-y in Q113, compared to quarterly average growth of 4.0% in

2012 and 17.5% in 2013 Although fixed investment will increase at a slow pace this year, we reaffirm ourview that, as low base effects take effect during H214, growth in year-on-year terms will rebound Indeed,

BMI's Infrastructure and Construction research team remains relatively optimistic on the outlook for the

construction industry, and we forecast annual average growth of the industry of 4.1% y-o-y over the

2013-17 period In particular, we expect the infrastructure transportation segment - which represents over50% of total infrastructure - to expand at a steady pace over the coming years Indeed, Israel's NationalInfrastructure Committee approved a US$3.2bn programme to electrify 420km of existing and plannedrailway on August 12, including rolling stock and the construction of transformer stations and a controlsystem We project gross fixed capital formation expanding 0.1% and 4.0% in 2013 and 2014, respectively

Fixed Investment And Imports On A Steep Decline

Israel - Components Of Real GDP, % chg y-o-y

Source: BMI, Central Bureau of Statistics Israel

Net Exports

We see Israel's net export position coming in surplus to the tune of 0.8% and 0.6% of GDP in 2013 and

2014, respectively, from a deficit of 0.8% of GDP in 2012 Total exports increased 2.8% y-o-y in Q113,compared to average quarterly growth of 0.1% in 2012 and 5.2% in 2011 Low base effects will ensure thatexports expand at a faster pace this year compared to 2012 That said, we project the economy in theeurozone contracting 0.5% this year and expanding 0.9% in 2014, from a 0.6% contraction in 2012, while

we see real GDP growth in the US increasing 1.8% in 2013 and 2.8% in 2014, from 2.8% growth in 2012

As the United States and the eurozone together account for approximately 60% of Israel's exports, growth inthe segment will remain slack this year, before picking up in the next We forecast total exports increasing2.5% in 2013, with the expansion largely a result of low base effects, before increasing 3.0% in 2014

Imports declined 10.6% in Q113, compared to growth of 3.9% in 2012 Given slow expansion in fixedinvestment, we forecast imports to remain relatively low going forward In addition, Israel started pumping

gas from the Tamar field by June, which will enable the country to reduce its dependence on imported gasfor much of its electricity generation We forecast total imports increasing 0.5% in 2013 and 1.5% in 2014.

Risks To Outlook

Risks to the outlook are lying firmly to the downside Given the likelihood of US airstrikes on Syria overthe coming weeks, following accusations that the Assad regime used chemical weapons to kill hundreds of

civilians (see 'High Possibility Of 'Limited' US Air Strikes', August 26), potential for an escalation of the

conflict is elevated Security risks in Israel, which shares a portion of its northern borders with Syria, couldincrease significantly, hindering investors' confidence and consumer demand

Table: Israel - Economic Activity

2008 2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Nominal GDP,

ILSbn 3 722.7 770.7 818.1 869.9 915.1 964.4 1,016.80 1,084.60 1,168.90 1,259.30 Nominal GDP, US

Notes: e BMI estimates f BMI forecasts 1 Seasonally adjusted; 2 Seasonally adjusted, methodology was adjusted in

2012 Sources: 3 Central Bureau of Statistics/BMI; 4 World

Industry Risk Reward Ratings

There are no changes to the rankings of the 13 countries in our Middle East and Africa (MEA) IT Risk/Rewards Ratings (RRR) in our Q114 update In terms of aggregate scores, only Kuwait saw a marginalincrease in its overall score, following an upgrade to its Country Risk rating The region's IT sector remainsone of the fastest growing globally, albeit from a low base Although growth is mainly driven by

governments and large companies in most cases, we are seeing an increase in the adoption of IT servicesand solutions by small- and medium-sized enterprises and consumers, owing to improved access to high-speed data networks and the availability of affordable devices

Some of the factors that will drive growth in the IT sector in 2014 include government-led IT initiativessuch as e-governance and schools computerisation projects, investments in next-generation network (NGN)

infrastructure, and strong private consumption growth BMI is bullish over the growth outlook for cloud

computing services in the region, despite the significant downside risks, as businesses adopting IT solutionsfor the first time bypass traditional data storage and application usage models We expect the uptake ofcloud services and the growing threat of cyber crimes to boost demand for IT security solutions in theregion

Qatar retains the top position on our table with an aggregate score of 68.4, just 0.2pts above second rankedIsrael Qatar is one of two countries with a Country Rewards score of 100, reflecting strong performances inkey macroeconomic indicators such as GDP per capita, urbanisation and employment Qatar has the thirdhighest score in the Industry Rewards category despite having one of the smaller populations in the region.Qatar's score in this category benefits from the expected increase in IT investments in the run-up to the 2022FIFA World Cup to be hosted by the country

Despite losing the top ratings spot to Qatar, Israel remains the most developed IT market in the region, withadvanced production capabilities and high government, corporate and consumer spend on IT products andservices Israel has the highest score in the Industry Risks category owing to the implementation of highstandards on IP protection and anti-piracy laws We believe this factor is crucial to the market's

attractiveness to major global IT firms Some of the major firms that consolidated their footprint in Israel

through acquisitions and partnerships with local firms in 2013 include IBM, HP, Intel and Cisco Systems.

The UAE, in third position with an aggregate score of 65.4, has arguably the most dynamic IT marketamong the GCC states, owing to its positioning as a regional hub for many global businesses, significantgovernment spending on infrastructure projects and a large secondary market from temporary visitors We

have a positive growth outlook for the UAE's IT market based on the country's macroeconomic

fundamentals and the development of next-generation broadband infrastructure We expect these factors toform the basis of continued government and private investment in advanced IT solutions, as well as theuptake of IT products and services by consumers

Kuwait and Saudi Arabia are in fourth and fifth positions on our table Kuwait is boosted by its maximumscore in the Country Rewards category, but limited in the Industry Rewards segment by its small

population The country lags behind other GCC states in the development of fibre-based fixed networkinfrastructure, a development that could stifle growth in the IT sector in the future Saudi Arabia has a muchbigger market in terms of population and has invested more in NGN infrastructure However, it scoresconsiderably lower than Kuwait in the Country Rewards category owing to a lower GDP per capita andlower urbanisation rate

South Africa is the highest-ranked African country on our table It occupies sixth position, ahead of the tworemaining GCC states Oman and Bahrain, which have the two lowest Industry Rewards scores in the regionbecause of the small sizes of their markets In contrast, South Africa benefits from a high Industry Rewardsscores owing to its large population and growth potential in the consumer segment South Africa is still thehub for Africa's IT services market, although it is facing increasing competition from other countries such

as Kenya

Nigeria is in ninth position on our table, with a similar score to South Africa in the Industry Rewardscategory mainly because of its large population However, its Country Rewards is one of the lowest in theregion, reflecting a GDP per capita of less than US$2,000 Although the low purchasing power of majority

of consumers is stifling growth in the consumer segment, BMI notes there are significant growth

opportunities in the enterprise sector, with the financial services, oil & gas and telecoms sectors drivingmajor investments In future we expect the privatisation of the power sector and developments in theaviation and retail sectors to boost growth

Lebanon and Ghana are in 10th and 11th positions respectively While Lebanon's aggregate score is affected

by a weak regulatory environment and, consequently, a poor Industry Risks rating, Ghana is held back by alow Country Rewards score Lebanon has a youthful and educated workforce that could attract IT investors.However, the slow pace of reforms in the telecoms sector is holding back the deployment of affordableNGN infrastructure, while the volatile security situation in the country, particularly with the ongoing civilwar in Syria, remains a major concern for investors

Ghana and Kenya, which remain rooted to the bottom of our table, have the lowest GDP per capita figures

in the region Although this is a major limitation to the uptake of IT products and services in the consumer

segment, BMI notes the governments of both countries are championing ambitious e-government and

computerisation projects in schools Furthermore, we expect the development of their nascent oil & gasindustries and investments in broadband infrastructure to boost IT investments

Table: MEA IT RRR - Q1 2014

Rewards Risks Country Industry Rewards Country Rewards Industry Risks Country Risks Rating IT Rank Previous Rank

economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns Source: BMI

Although Egypt is no longer at the bottom of our table due to Kenya's weaker aggregate score, the country

is arguably the biggest underperformer among the 13 countries in our coverage Egypt is one of the biggestmarkets in the region in terms economy and population, while its geographical location and educatedpopulation gives it the potential to be a regional hub for a range of IT services and solutions, including

manufacturing and business process outsourcing (BPO) services That said, BMI retains the view Egypt

could still realise its potential in the IT sector if the current economic and political challenges in the countryare resolved soon.

mid-will be a boost from the release of Microsoft's Window 8 operating system, launched in October 2012,

which set off greater competition and innovation in tablets, notebooks and hybrids

As well as economic and IT market trends, another factor behind our pessimistic outlook for 2013 is the risk

of a further escalation of hostilities between Israel and Gaza This uncertainty will drag on confidence andcurtail investments in some areas Wider economic uncertainty means businesses are now investing more toincrease flexibility and realise cost efficiencies rather than expand IT hardware capabilities, but nonethelessthere should be growth areas However, as noted, lower average prices have meant that revenue growth inmost segments has lagged shipments

BMI forecasts real GDP growth of 3.5% in Israel in 2013, a slight improvement from 3.1% real growth in

2012 However, the more relevant figures for the hardware market are the slower rate of real private finalconsumption growth, at 2.5% in 2013 compared to 3.2% in 212, and the slowdown on real governmentspending from 4% in 2012 to 2.5% in 2013 The government's policies are less supportive of privateconsumption in 2013 The 1% rise in VAT that was part of the government's package of austerity laws,approved by parliament in August 2012, will have an impact on discretionary spending on items such asPCs and notebooks This has an obvious impact on the growth potential of the IT market, as consumersconsider reigning in their spending and government faces fiscal constraints on new investments

Despite the weak consumer outlook in Israel there are several factors which present an optimistic mediumterm outlook for continued hardware sales Current PC penetration, while high for the region, showspotential for organic growth Household penetration is estimated at around 75%, meaning there is somepotential for sales to first-time buyers However these new sales will be concentrated in lower incomesegments, which will mean low margins for vendors in this sub-segment

Digital divide issues mean Israel currently has 600,000 children living below the poverty line, only 3% ofwhom 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 industryinsiders as too low

Upgrades to new systems and purchases of personal computing devices will remain the bulk of marketsales Mobile computing devices including tablets, slimline notebooks, ultrabooks and hybrids present agrowth opportunity for vendors as consumers buy personal products to complement the household desktop

or laptop This segment will be held back by a weak consumer outlook in 2013, but will strengthen from2014

It is significant for medium term hardware sales that telecoms networking infrastructure in Israel continues

to receive investment This generates use cases for IT hardware, including desktops and mobile computingdevices and helps to increase demand

Meanwhile, the release of Windows 8 is expected to result in higher sales in the retail and enterprisemarkets In the retail market Windows 8 will deepen the tablet market, as well as introducing hybrids, while

in the enterprise market the new OS should trigger computer hardware tenders previously delayed because

of the economic situation In 2012, retailers claimed that many businesses and consumers were waiting for

the October 2012 release of Microsoft's new operating system before investing in an upgrade The launch

of Windows 8 in Israel coincided with the launch of the Surface tablet and a new suite of mobile handsetsusing Windows Mobile Microsoft CEO, Steve Ballmer, began an international promotional tour for thenew operating system in Israel in November 2012 An upgrade to Windows 8 was available to Israeliconsumers for US$40 to download or ILS280 installed in store

Evolving Form Factors

The Israeli IT market is relatively mature, but

hardware still accounted for 42.9% of the total

market in 2012 (excluding communications

hardware) Prior to 2012, notebooks were the

fastest-growing segment of the market, although as recently

as 2008 desktops still took around two-thirds of unit

sales However in 2010-2011 the share of desktops

declined precipitously, and then in 2012 there was a

shift from notebooks to tablets as the fastest growing

segment of the market

This trend of preference for mobility is expected to

continue over the 2013-2017 forecast period Despite

its declining share of sales, however, the desktop

sector is still significant, largely due to business and

government end-users One device category we

believe to be on the way to becoming obsolete is the

netbook, which had been a driver of PC market growth in 2010, but have plateaued in the face of

competition from tablets and smartphones In particular, smartphones from Samsung, RIM, Apple and

other vendors are being offered as alternative connectivity solutions and often include a Wi-Fi option Thecompetition from tablets and smartphones is also driving innovation in notebook design, as slim-line andhybrid devices are increasingly the centre-piece of Windows vendors product ranges

The tablet market in Israel has been dominated by Apple However, its relative position did weaken in 2012

and it faces much stronger competition in 2013 Data from Statcounter show Apple's iOS, run on its tablets,accounted for 2.1% of Israeli PC browsing traffic in March 2013 - a figure that was up by 1.2pps y-o-y

Meanwhile, Google's Android OS, which is used on Samsung, Asus and Google's own Nexus range

accounted for less than 1% of PC browsing traffic in March 2013 This recent data reinforces Apple'sdominance However, with the widening range of Android devices - including the Kindle Fire from

Amazon, the Nexus 7 and 10 and Samsung's Galaxy Tab range - competition will continue to intensify.

A key feature of the threat posed to Apple by Android vendors came only after the release of lower costtablets and were predominantly the smaller 7" form factor This contrasted with Apple's larger and more

Hardware Demand

2010-2017

e/f = BMI estimate/forecast Source: BMI

expensive iPad - and the popularity of these smaller, cheaper devices, catalysed the development of Apple'sown iPad Mini Apple is set to face competition throughout 2013 from rival Android vendors that will offerconsumers a wider choice in terms of price and size, as well as specifications and features.

The gap between the strategies of some of the leading players is also worth noting On the one hand Appleand Samsung are hardware vendors and look to profit from the sale of devices, while on the other sideGoogle and Amazon are services firms and offer tablets almost at cost The strategies of services firms(combined with low cost OEM tablets from China) will likely put pressure on the margins of hardwarecentric vendors in the medium term

The tablet market in Israel remains relatively undeveloped, with low penetration, and heavily dominated by

Windows machines BMI forecasts Israeli market PC tablet sales at 279,000 units in 2013 and projects that

sales could pass 500,000 in 2017 As such a significant development that will affect both the tablet marketand the notebook market is the arrival of Windows 8 In October 2012, with the launch of the new OS,Windows vendors were able to introduce touch devices - with a number of tablets released in Q412 andQ113 The addition of more vendors and another touch OS will add to competition in the market - puttingfurther pressure on prices

However the more significant development is the medium term impact on innovation and form factors.Windows has a traditional strength in productivity use cases and software, with the OS being central to theenterprise market and Microsoft's Office Suite ubiquitous There is therefore an opportunity for vendors toleverage this strength over rival iOS and Android devices by designing tablets with strong productivityfunctionality alongside the passive media consumption features Early examples have been hybrid devices

such as Microsoft's own Surface (RT & Pro), Hewlett-Packard's Envy and Lenovo's Yoga and Helix.

Although design innovation has some way to go, and prices of hybrids will need to decline, the multi-usedevice has scope to capture a share of the tablet market by offering a stronger value proposition to

consumers while not compromising on user experience

Another device category that should receive a boost from the launch of Windows 8 is the ultrabook Theyare higher-performance notebooks designed as a response to Apple's increasingly popular MacBooks, andare an emerging product category that Intel and certain vendors backed heavily Due to initially high prices,these devices failed to enjoy the hoped-for success, at least initially Vendors appear to have realised thisand are moving ahead with plans to supply low-end ultrabooks

Vendor Performance

The Israeli PC market has undergone significant

changes in terms of market shares In the PC market,

the top three vendors, HP, Lenovo and Dell, had

enjoyed a combined market share approaching 50%,

but while Lenovo has gone from strength to strength,

HP and Dell have been hit by competition from Asus

and Samsung - as well as the shift to tablets Most

PC market growth in 2012 was driven by growth in

the mobile PC segment, and in fact notebook sales

declined and growth was solely driven by tablets

according to research from IDC IDC's data for 2012

show that laptop sales declined 16.4% from 2011 to

2012, falling to 426,526, in contrast to a 20.2%

increase in tablet sales to 225,767 In the laptop market Lenovo leaped to top spot with a market share of21.2%, overtaking HP and Dell In second position was Asus with 16% market share, up from 12.2% in

2011, also overtaking HP and Dell which both had 15.2% market share in 2012 Based on these figures

BMI estimates that Lenovo and Asus achieved 8.8% and 9.7% growth in laptop unit sales respectively, in

stark contrast to the 25.6% and 40.3% respective declines in laptop unit sales for HP and Dell

Meanwhile, the tablet market continues to be dominated by Apple, according to IDC data for 2012 Appletook a 49.8% share of tablet sales, more than double the share of second placed Samsung which had 20.1%share However, as impressive as this dominance is Apple's share of the tablet market declined 6.4pps y-o-yand units sold only increased 6.6% in 2012, versus 20.2% increase for the market as a whole The othervendors chasing Apple include Samsung and Asus, which we calculate from IDC data to have achieved27.9% and 138.5% unit growth in 2012 Asus is believed to have benefited from the manufacture of

Google's Nexus 7 alongside its own products

Chinese giant Lenovo has built its strong position atop the Israeli market following its purchase of IBM's

PC unit back in 2005 and in 2012 the company continued 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 thesecond largest PC vendor overall Acquisitions and strategic investments are part of Lenovo's strategy toconsolidate its position in the Israeli market, and in February 2012 the vendor announced that it would

Israel PC Browsing Traffic By OS (%) And Y-o-Y Change

March 2013

Source: Statcounter

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

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

In H113, leading software vendors in the Israeli market reported steady, single-figure growth, much in linewith our forecast Leading Israeli software and services group Formula Systems announced that its revenueswere up by 6% in Q113, compared with the same period of the previous year However group companyMatrix, which derives most of its revenues from the Israel market, experienced a decline in its operations,due largely to seasonal factors In Israel, the first quarter usually reflects a decline following an active fourthquarter, during which companies seek to utilise budgets before the end of the fiscal year The third quarter isalso generally a slower quarter, reflecting reduced activities during the summer months

Despite the uncertain global economic outlook for Israel's export-based economy, opportunities for softwarevendors continue to exist across a range of sectors from government to energy, financial services, telecomsand utilities Major customers for software solutions in Israel include large and medium enterprises such ascommercial banks, loan and mortgage banks, credit card companies, insurance companies, telecoms service

providers, hi-tech companies, and the Israeli Defence Force and government ministries and public agencies.

Large organisations investing in SAP-based systems included the Meitav Regional Water and Sewage Corporation and Israel Direct Insurance (IDI) Local IT leader Ness was among those vendors reporting

a rebound in Israeli market revenue growth, with the company's annualised revenue growth increasing ineach quarter

Meanwhile, the SME segment, the mainstay of the Israeli business sector, has emerged in recent years as animportant growth area for enterprise systems Spending on enterprise solutions should continue to growsteadily, with reviving or emerging areas of opportunity including security, CRM solutions and businessintelligence However, in the current economic climate, vendors will continue to pitch the efficiency gainspotentially offered by these applications

Microsoft Israel has an annual turnover of around

US$1bn It hopes its Windows 8 operating system,

launched in October 2012, will continue to boost

sales throughout 2013, with support for the

Windows XP operating system due to be withdrawn

in 2014 Israel also hosts an important research and

development centre for Microsoft, one of its 3

largest global facilities 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

Software-as-a-Service (SaaS) market opportunity About 70%

of the centre's work is now focused on cloud computing, with Microsoft Israel expecting to hire up to 100new workers for cloud computing projects

Migrations to the Windows 8 operating system should have a positive impact on 2013 sales despite businesscaution and the fact that the pre-launch publicity for Windows 8 was more low-key than for its predecessorWindows 7 Microsoft is touting the touchscreen capabilities of Windows 8 and Q412 saw the release of a

Software Sales (ILSmn)

2010-2017

e/f = BMI estimate/forecast Source: BMI.

new wave of Windows 8 tablets and notebooks A large portion of Israeli computer users are estimated tostill be using the Windows XP operating system, accounting for over 25% of PC browsing traffic in March

2013, and this represents a significant potential market, as support for XP will be withdrawn by 2014

Current areas of enterprise demand include management of Microsoft systems and servers, as well assystems management, basic data management, firewalls, enterprise resource planning (ERP)

implementation and CRM CRM is a particularly buoyant area, while in 2012 vendors continued to sign upnew business intelligence customers The sheer volume of data that enterprises must now handle as a result

of device proliferation is fuelling investments in business analytics In May 2013, Arad Group, a world

leader in water meter technology, announced a partnership with IBM to help customers and water utilitiesmanage resources more efficiently through use of Big data and analytics technology The analytics wasdeveloped by IBM in Israel

The security software segment is an important opportunity, potentially worth hundreds of millions of dollarsover the medium term, and awareness of security issues has grown with the rise of cloud computing Israelhas 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 continueacross all segments, with security content and threat management the current priorities

The market will be catalysed by the October 2012 announcement from Israel's Prime Minister BenjaminNetanyahu that the government was working to create a 'digital Iron Dome' to protect vital infrastructurefrom hackers and viruses (the Iron Dome is Israel's anti-rocket defence system) This includes the

establishment of the National Cyber Bureau to defend the nation against computer terrorism This policyshould see vendors win public contracts, while also serving to focus the minds in the private sector

Local companies have appeared that will serve the local and international market Check Point and

Imperva are listed companies, while in March 2013 Israeli security services company Incapsula, an

Imperva subsidiary, was valued at around US$950mn after proving successful among small- and sized businesses Incapsula provides high-end firewalls to assess incoming traffic and identify possiblebugs Incapsula was established in 2009 and was created by three Imperva employees

medium-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 forinnovative 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 aiming to make a

transition to being a comprehensive provider of IT and computer solutions The company has launched aplan to expand its presence in Israel, with the establishment of a new R&D centre in the country.

Dell spent just 1.7% of sales on R&D in the first quarter, well below the level reported by many of itsindustry peers The company's software business is currently a small component of its overall product mix,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

technology 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 avariety of devices, including tablets In-memory computing, a technology which SAP is developing throughits HANA solution, is expected to revolutionise the way companies handle big-data SAP Labs Israel hasbeen at the forefront of SAP's work in this area, with more than 100 local developers participating in thedevelopment of the HANA in-memory solution Israeli developers were also responsible for the creation ofthe 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 clientbase In September 2010, Ness won a US$3.7mn, five-year contract from Israel's Meitav Regional Waterand Sewage Corporation to provide development, improvement and maintenance services for the company'sSAP-based ERP and billing system The contract also included an optional three-year extension, valued atUS$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 otherhigh-growth Middle Eastern markets SAP implementations are a major IT services category in Israel, andSAP aims to be closer to its customers and partners However, SAP continue to work with Ness as asystems integrator and the latter will also retain its SAP Academy training centre

Another enterprise software player, US vendor CA Technologies, is extending its Israeli university

relationship programme, with plans announced in 2012 to roll-out a new Innovation Centre in partnershipwith Tel Aviv University The new centre is expected to focus on areas such as IT management and cybersecurity

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 R&D centre on the basis of Exanet's team Meanwhile, in mid-2012, shares in

Israeli storage business company, Mellanox Technologies, surged on rumours that either IBM or Oracle

might buy the firm

Given the current focus on many businesses of controlling costs, the pay-on-demand Software-as-a-Service(SaaS) model has grown in popularity and spread beyond the initial core application area of CRM Theeconomic crisis may have provided a lasting boost to the SaaS model, particularly as broadband penetrationgrows More vendors are looking for channel partners to help them offer cloud computing and rentedsoftware services to local organisations

New cloud computing offerings and increased competition in this segment should fuel further demand fromusers As well as cost savings, businesses will look to boost efficiency and increase flexibility of response tocustomer needs Large businesses are most likely to put IT applications such as mail, phone systems anddocument 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 onpremise

In terms of verticals, the financial sector has been a mainstay of demand, with other key areas includingdefence and healthcare Despite the recent financial crisis, regulatory compliance and demand for newservices will continue to drive IT spending by banks IT spending from this vertical has been positivelyimpacted by regulatory reform and changes affecting banking and insurance in the wake of the globalfinancial crisis Such changes generate demand for specific IT solutions, often in a set time period

Following the economic crisis of late 2008 and 2009, vendors reported that the key financial servicessegment actually saw demand increase Israeli legislation passed in 2010 and 2011 increased Israeli

Securities Authority regulatory supervision over the offering of investment services and administration ofinvestment portfolios This in, turn, increased demand for solutions for entities that became subject to suchsupervision Similarly, defence spending on new systems is likely to be maintained given the currentsecurity situation

Software comprises an important part of Israel's industrial production and exports, with software exports ofUS$3bn representing around two-thirds of the value of the entire domestic IT sector Almost all globalvendors 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, includingmarket leaders such as SAP and Oracle, are entering with appropriate software packages Microsoft is alsodesigning a software package for this market segment.

Services

The IT services segment is forecast to reach a value of ILS7.91bn in 2013 and this is expected to grow at aCAGR of 6.3% over the forecast period to reach ILS10.11bn in 2017 In H113 vendors reported a continuedflow of new projects in sectors such as government, financial services, homeland security and utilities Keysectors such as government and financial services had driven a pick-up in growth in 2010 after demand washit by a slowdown in 2009 Regulatory reforms in the wake of the economic crisis of late 2008 and 2009proved a driver of IT spending in these sectors

A slowing economy is posing a challenge to Israeli market IT services vendors in 2013, with the downtrend

in business investment expected to continue into H213 However, demand for IT services has generallycontinued to be healthy, according to leading vendors, with new projects across public sector, industrial andfinancial verticals The defence and homeland security sector has also been solid In 2012, leading software

vendor Matrix, which is part of the Formula Systems group and employs 6,500 people, reported revenues

of US$515,000 Matrix, which offers custom software development services and also sells solutions frominternational vendors, derives most of its revenues from the Israeli market Matrix's chief rivals in its

domestic market include fellow Israeli IT services giant Ness Technologies, as well as Team-Malam, One-1, Taldor Computer Systems, the Elad Group and Yael, as well as international competitors like HP

and IBM International vendors in the Israeli market often work with local subcontractors

All vendors in the Israeli market have had to adapt to an environment where some projects are

commissioned more in response to immediate needs, with a focus on cost reduction Given there is noshortage of technical skills in Israel, internal IT departments often prefer to develop solutions in-house.Major client sectors for market leaders like Matrix and Ness include the financial services and governmentsectors as well as other segments like utilities

The IT services market is influenced by regulatory reform which influences and drives demand in sectorslike government, with much spending related to e-government targets, financial services, where an increase

in regulatory supervision has necessitated new IT investments, and telecoms, where spending is driven bythe roll-out of new platforms and services In August 2012, Ness was awarded a 10-year contract fromIsrael's Ministry of Finance to establish and operate the country's new National Long-Term Savings andInsurance Exchange The new exchange is expected to streamline work processes, and provide the publicwith information about the retirement savings and insurance plans on offer So important is the project to