Israel information technology report q2 2015

... growth of 3.1% in 2015, from our previous forecast of 3.3% © Business Monitor International Page 21 Israel Information Technology Report Q2 2015 Low Base Effects Key To Rebound In 2015 Israel - GDP... Monitor International Page 24 Israel Information Technology Report Q2 2015 Investment in the Israeli technology segment will contribute to capital formation growth in 2015 On November 11, 2014,... Industries technology campus in the Negev and expand its computer services segment in Israel © Business Monitor International Page 45 Israel Information Technology Report Q2 2015 Israeli Start-Ups

Q2 2015 www.businessmonitor.com

ISRAEL

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

Report Q2 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2015

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BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline 11

Political 12

Economic 13

Industry Forecast 14

IT Market 14

Table: IT Industry - Historical Data And Forecasts (Israel 2012-2019) 14

Wireline 19

Table: Telecoms Sector - Wireline - Historical Data & Forecasts (Israel 2011-2018) 19

Macroeconomic Forecasts 21

Economic Activity 21

Table: MENA - Operational Risk 24

Table: Economic Activity (Israel 2009-2018) 27

Industry Risk Reward Index 28

Industry Risk Reward Ratings 28

Table: MENA Q215 RISK/REWARD INDEX 31

Market Overview 32

Hardware 32

Software 37

Services 41

Industry Trends And Developments 44

Regulatory Development 49

Table: IT Regulatory Authorities 49

Table: Government Initiatives 51

Competitive Landscape 53

International Companies 53

Table: Intel 53

Local Companies 54

Table: Amdocs 54

Table: Check Point 55

Table: Imperva 56

Table: Retalix 57

Company Profile 58

Matrix 58

Ness 62

Hilan 67

Table: Hilan Financial KPIs, 2008-2014 70

Regional Overview 71

Table: Sap Africa's Growth Pillars, August 2014 73

Demographic Forecast 75

Table: Population Headline Indicators (Israel 1990-2025) 76

Table: Key Population Ratios (Israel 1990-2025) 77

Table: Urban/Rural Population & Life Expectancy (Israel 1990-2025) 77

Table: Population By Age Group (Israel 1990-2025) 78

Table: Population By Age Group % (Israel 1990-2025) 79

Methodology 80

Industry Forecast Methodology 80

Sources 81

Risk/Reward Index Methodology 82

Table: It Risk/Reward Index Indicators 83

Table: Weighting Of Components 84

BMI Industry View

BMI View: Israel's vibrant ICT start-up community and highly skilled tech workers have attracted record

breaking investment to the high-tech sector in 2014 While the available pool of skilled workers will

eventually dwindle, investment will remain high in 2015 as Chinese ICT firms begin competing for talent with their Western counterparts However, because of the comparatively high penetration of IT products and services, as well as its small population, Israel's IT market is expected to grow more slowly than most others in the region Given Israel's geopolitical location and the uptick in violence in the region in 2014, we expect spending on cyber security to be a key driver of growth in Israel's IT market, chiming with our view that software and services will increase as a proportion of IT spend to account for more than 66% of the market by 2019.

Headline Expenditure Projections

Computer Hardware Sales: Forecast to reach ILS9.4bn in 2015, up from ILS9.225bn in 2014 We expect

growth to accelerate in 2015, driven by the full launch of 4G mobile networks and ongoing migration to theWindows 8 OS

Software Sales: ILS6.414bn in 2015, up 9.3% year-on-year (y-o-y) from ILS5.867bn in 2014 Enterprise

software spending will be the main growth driver as device and data proliferation will result in increasedspending on customer relationship management (CRM), databases and business intelligence

IT Services Sales: We expect IT services sales will continue to outperform the rest of the IT market,

reaching ILS8.793bn in 2015, up from ILS8.263bn in 2014 Cyber security services will outperform interms of growth, but it will be stable sectors such as government and defence that continue to account forthe majority of spending

Key Trends And Developments

In January 2015, Amazon and Dropbox joined the fray of IT investment in Israel, intending to use their acquisitions of chipmaker Annapurna Labs and mobile productivity tools developer CloudOn,

respectively, as a starting point to expand their R&D operations in Israel Dropbox announced that it will infact discontinue CloudOn's products in March, and its 30 employees will then begin focusing on Dropboxproducts, which illustrates that Israel's skilled tech workers are at least as important to global IT firms as thewide range of innovative products they have developed

Israel's Central Bureau of Statistics estimates there were around 145,000 jobs in the ICT services industry atthe end of 2013 Although continued entry of global IT firms will add to the number of ICT services jobs, in

a country with a total working age population of 4.8mn in 2014 the pool of skilled workers is limited It istherefore unlikely that the level of investment will remain as high over the longer term, once the mostattractive start-ups and experienced tech workers are bought up and hired by global firms

Nevertheless, we expect investment in Israel's IT sector to remain strong throughout 2015 as competitionamong global IT players to attract skilled workers intensifies Notably, in late 2014 Chinese firms also

began courting Israel's high tech start-ups China's Ping An Insurance Co participated in a USD85mn round of funding for content marketing and monetisation firm IronSource in September 2014, while Baidu invested USD3mn in remote controlled video camera company Pixellot in November, and Alibaba invested

in animated QR code start-up Visualead in January 2015 We expect Chinese players to follow the lead of

their Western counterparts and establish R&D hubs in Israel over the coming quarters

IT SWOT

SWOT

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 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 30% of the bottom-income group having home internetaccess

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

■ Defence and government projects should be less sensitive to fiscal retrenchment,with a major data centre project under way for the Israel Defense Forces

■ Outsourcing, software-as-a-service and applications management likely to growfastest out of IT services, with particular opportunities in the financial sector

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

SWOT - Continued

Threats ■ Government austerity measures will dampen consumer and business spending

■ 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 ■ The launch of 4G LTE could accelerate the rate of fixed to mobile substitution

■ 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

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 continuing, risks of a spill over into Israel are ever-present

Opportunities ■ A warming of relations with Greece has given Israel the ability to engage in military

exercises over a larger geographic area

Threats ■ Finding a lasting solution with the Palestinians continues to pose a dilemma for Israel,

and we think a final agreement will remain elusive Risks of a radicalisation in theWest Bank are thus prominent

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

SWOT Analysis

Strengths ■ The workforce is highly educated and skilled, which will continue to attract investment

in the IT and pharmaceutical sectors

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

Weaknesses ■ A sharp deterioration in the security situation 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 and Europe in terms of exports andinvestment

Opportunities ■ In the next five years, relatively elevated levels of employment will underpin robust

private consumption growth

■ Israel produces more technology start-up companies than any other country in theworld except the US

■ The discovery of large offshore gas deposit will bring an influx in foreign investmentand is expected to serve the country's energy needs for decades

Threats ■ Competition from emerging Chinese and Indian producers of high-tech goods and

polished diamonds could undermine demand for Israeli exports

e/f = BMI estimate/forecast Source: BMI

We continue to hold the view that the Israeli IT market will experience slow and steady growth over themedium term and gradually decline as a percentage of GDP This is a product of saturation of the hardwareand software/services market and price competition between vendors, which will hold down the overallvalue of the market Nevertheless, Israel remains at the forefront of development of security services andcontinues to attract investment in research and development centres from global IT firms

We estimate the IT market to reach a value of ILS23.355bn in 2014, equal to USD6.528bn and up fromILS22.6bn in 2013 Despite our expectations of relatively weak growth in 2013 and 2014, we maintain amore positive outlook for Israel's IT market over the long term Israel remains a robust IT market withplenty of opportunities across industrial, government, defence and financial services spending

Our five-year compound annual growth rate sees growth around 4.8% in Israeli new shekel terms for theperiod from 2014-2018 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, thefinancial services and defence sectors drive growth, with rising geopolitical tensions likely to result in evenstronger demand for IT security solutions The nature of sales will change, however, as business

management becomes increasingly important and the hardware segment contributes comparatively less tothe market's overall growth Given Israel's rich tech skills resource base, many organisations prefer toconduct software development in-house

2015 Outlook

We project real GDP growth of 3.1% in Israel in 2015, an improvement on a slight economic downturn in

2013 BMI's Country Risk team downgraded Israel's growth forecast slightly in the wake of the violence

between Israel and Gaza, but does not expect the events to have a lasting negative impact on the economy.Over the remaining years to 2019, we expect slow but steady acceleration in the economy, with average

annual GDP growth of 3.5% BMI also forecasts underwhelming expansion of private consumption growth

at 3.5% in 2015

While government austerity and political instability weighed on Israel's economic outlook in 2013 and early

2014, we believe opportunities for vendors in the IT market will expand more quickly in 2015, most notably

in demand for cyber and information security products and services This is a growth area in IT marketsglobally, but there is a particularly large opportunity in Israel where regional political tensions and theuptick in cyber attacks since 2012 affecting Israel, UAE and Saudi Arabia, have concentrated the minds ofgovernment and enterprise decision-makers on investments to protect their IT systems

Other areas where we expect to see growth include business intelligence and cloud computing, with thelatter likely to gain traction among small- and medium-sized enterprises (SMEs) as a lower cost alternative

to bespoke systems Meanwhile sales of hardware and software will continue to benefit from Windows-8driven upgrades The move to mobility and new form factors such as tablets, hybrids and ultrabooks willhelp to drive demand in the consumer segment, while to some extent undermining demand for traditionalnotebooks

Meanwhile, despite the challenging trading conditions, vendors have reported a continued flow of IT

projects, with large tenders from the Israeli ministries of finance and defence and the Bank of Israel In December 2013 VMware won a data centre contract from the Israel Defence Forces valued at USD27mn in

the local media

Industry Trends - IT Market

2012-2019

IT market value, ILSmn (LHS) IT market value, % of GDP (RHS)

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 0

10,000 20,000 30,000 40,000

1 1.5 2 2.5 3

e/f = BMI estimate/forecast Source: BMI

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 2019 Although household computer penetration of more than 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 With the full launch of 4G LTEnetworks in 2015, spending will continue to move away from desktops as more consumers acquire moremobile personal devices such as tablets - which may also cut into spending on notebooks

Per capita IT spending is expected to rise from ILS2,986 in 2014 to ILS3,585 by 2018 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 willkeep 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 financial services,telecoms and utilities.

While the defence sector is expected to remain the single most important vertical, investments by financialsector organisations should mean more large outsourcing deals Other sectors of opportunity will includehealthcare and telecoms, as well as infrastructure, transport and the small office and home office sector

Income Per Capita Breakdown

(2012-2019)

Poorest 20%, net income per capita, ILS Richest 20%, net income per capita, ILS Middle 60% of population, net income per capita, ILS

2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f 0

100,000

25,000 50,000 75,000

e/f = BMI estimate/forecast Source: BMI, national sources

Opportunities

BMI expects IT services will display the highest growth over the forecast period to 2019, due to growth in

key verticals and the opportunities presented by cloud computing, big data analytics and real-time enterpriseservices based on the internet of things

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 retail, as organisations in thosefields look to save money on hardware and improve customer services

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

BMI believes IT spending has 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 andprice competition between vendors limit increases in the total value of the market The hardware market isforecast to grow from ILS9.2bn in 2014 to ILS10.1bn in 2019, with PC sales projected to rise from anestimated ILS7.9bn to ILS9.0bn While growth will remain strong, the market will be increasingly

dominated by IT service sales and software sales, indicating the maturity of the market BMI forecasts

software sales to account for 29.2% of Israel's IT market by 2019, up from 25.1% in 2013, while servicesare forecast to rise from 35.4% of the IT market to 37.2% over the same timeframe

Inhabitants 23.9 25.5 26.2 27.2 27.8 28.2 28.5 28.5

f = BMI forecast Source: BMI

Industry Trends - Wireline Sector

(2011-2018)

Broadband internet subscribers, '000 Main telephone lines in service, '000

2011 2012 2013 2014f 2015f 2016f 2017f 2018f 0

1,000 2,000 3,000 4,000

f = BMI forecast Source: BMI

BMI estimates there were around 3.35mn active fixed-line connections in Israel at the end of 2014 This

was a decline of 6.8% y-o-y on the back of acceleration in fixed-to-mobile substitution, driven by falling

mobile tariffs and the rapid expansion of mobile data networks That said, the country's fixed broadbandoperators have reported strong uptake in multiplay packages in recent quarters, a trend we expect thecushion the decline in fixed-line connections during our forecast period, ending in 2018.

Our new forecast expects continued fixed-line growth in 2014 and a generally flat performance in theremainder of our forecast period However, we note that the country's high penetration rate has the potential

to increase the downward pressure on fixed-line connections We predict there will be 3.384mn lines by theend of 2014, equivalent to a penetration rate of 43.3% By the end of 2018, we anticipate a market of around3.405mn lines and a penetration rate of 40.6%

Incumbent fixed-line operator Bezeq's market share continues to fall as a result of competition from

alternative cable operators such as HOT Telecom, and from Partner The latter, which significantly strengthened its position after buying a stake in 012 Smile, reported solid fixed-line customer growth in

2012

Owing to the lack of reliable data on the number of mobile broadband subscribers (specifically thosesubscribers 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 and alternative operators HOT and Partner Communications suggests

that the number of fixed broadband subscribers had increased to around 2.025mn at the end of 2013, up by

3.9% y-o-y BMI believes that, by the end of 2014, Israel's broadband subscriber base will have risen to

2.128mn; this is equivalent to a penetration rate of 27.2% and reflects full year growth of 5.1%

Over the next five years ending 2018 we envisage average annual growth of around 2% for the Israeli fixedbroadband sector This will see the subscriber base reach 2.384mn subscribers, equivalent to a penetrationrate of 28.4% We expect the growing popularity of mobile broadband services to result in slowing demandgrowth in the fixed broadband sector Nevertheless, we identify several developments which will sustainfixed broadband growth for the duration of our forecast and beyond These include new regulations forcingBezeq to open wholesale access to its DSL infrastructure, the launch of wholesale broadband services by theViaEuropa-led consortium building a fibre network over the Israel Electric Company (IEC) infrastructureand Bezeq's ongoing deployment of its fibre-to-the-cabinet (FTTC), a development which is helping todrive capacity for its residential and corporate customers' broadband access

Macroeconomic Forecasts

Economic Activity

BMI View: Accelerating exports and low base effects will lead to faster real GDP expansion in Israel in

2015, and the economy will continue to gather steam over the next five years On the back of the recent conflict with Islamist group Hamas and prospects for protracted political violence, we have revised down our 2014 and 2015 growth forecasts.

Growth in the Israeli economy will pick up in 2015, but the pace of expansion will remain modest We haverecently revised our 2014 growth forecast to 1.6% from our previous projection of 2.4%, mainly a result ofthe seven-week conflict with Islamist group Hamas in the Gaza Strip in July and August The economyshrank by 0.4% in the third quarter of 2014 due to the war, the first quarterly decline since Q109 - much theresult of a sharp uptick in imports

Low base effects and an uptick in export growth resulting from a weak shekel will trigger the increase ingrowth in 2015, even as protracted political violence will continue to cloud the outlook On November 18,four Israelis were killed, and eight injured, in a synagogue in West Jerusalem, only the latest in a series of

attacks (see 'Third Intifada Unlikely, But Increase In Violence Ahead', November 6, 2014) Risks to stability

will persist as long as a political solution to the Palestinian issue is elusive, and risks of radicalisation in theWest Bank will remain high We forecast real GDP growth of 3.1% in 2015, from our previous forecast of3.3%

Low Base Effects Key To Rebound In 2015

Israel - GDP

Nominal GDP, USDbn (LHS) Real GDP growth, % y-o-y (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f0

100 200 300 400 500

2 4 6

0 8

f = BMI forecast Source: Central Bureau of Statistics Israel, BMI.

Private Consumption Outlook: Private consumption will accelerate modestly in 2015, and we forecast

growth of 3.5% in 2015 from 3.3% in 2014 Consumer spending expanded by 3.9% y-o-y in Q314 - from1.8% y-o-y in H114 - despite the war in Gaza Consumer confidence as measured by Bank

Hapoalim's Consumer Confidence Index fell by 2.4 points in monthonmonth terms to 126.2 in October

-only 0.2% higher in year-on-year (y-o-y) terms, but we expect a gradual pick up over the next few quarters

Government Unable To Rein In DeficitIsrael - Government Revenues & Expenditure

Fiscal revenue, ILSbn (LHS) Fiscal expenditure, ILSbn (LHS) Budget balance, % of GDP (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 0

100 200 300 400 500

-5 -4.5 -4 -3.5 -3

e/f = BMI estimate/forecast Source: Israeli Ministry of Finance, BMI

For one, we believe that opposition to austerity will result in higher-than-expected fiscal expenditure in

2015 The 2015 budget does not differ significantly from the 2014 document - except for sizeable increases

in defence spending and the healthcare sector - as the government tries to rein in a burgeoning budgetdeficit However, requests for more spending on welfare from the general public and pressure from theLabour opposition to fight poverty will lead to an acceleration of current spending, which will feed into a

modest uptick in private consumption (see 'Government Deficit To Increase In 2015', October 13, 2014).

Accelerating export growth will also translate in increased investment in export-oriented sectors of theIsraeli economy, leading to increased employment opportunities, particularly from H215 onwards We seethe joblessness rate - which came in at 5.7% in October - to average 5.8% in 2015 from 6.1% in 2014

Government Spending Outlook: We expect public spending in education, healthcare and public services

to expand at a relatively robust rate next year as the government proves unable to rein in its fiscal deficit

BMI's Pharmaceuticals research team believes that public spending on health will continue to increase over

the coming years Indeed, the 2015 budget will see an uptick of ILS2.8bn (USD734mn) in funding for the

healthcare sector, the second largest increase after defence Health Minister Yael German said that

ILS315mn have been made available to strengthen the public health system, particularly by recruitingadditional staff and adding extra beds and equipment We project government consumption to expand by3.3% and 3.5% in 2014 and 2015, respectively.

Fixed Investment Outlook: We expect growth in gross fixed capital formation to accelerate in 2015, a

result of low base effects following a sharp decline in 2014 and increased production due to rising exportdemand Israel offers attractive foreign investment incentives, an educated workforce, and a transparentmarket-oriented economy, making it one of the most attractive destinations for investment businesses in theMiddle East and North Africa (MENA) region The country scores 58.4 out of 100 in BMI's OperationalRisk Index, and is placed in fourth place in MENA

Table: MENA - Operational Risk

Country Labour Market Risk Trade And Investment Risk Logistics Risk Crime & Security Risk Operational Risk

Investment in the Israeli technology segment will contribute to capital formation growth in 2015 On

November 11, 2014, US-based software firm Microsoft purchased Israeli security solutions provider Aorato, which develops security solutions to identify suspicious activity in company's networks, for

approximately USD200mn Israel's highly educated workforce and strong links with the US will ensure thatIsrael's technology and IT sectors will remain highly attractive to foreign investors over the coming years

The five-year outlook for gross fixed capital formation is encouraging, particularly given prospects for

increasing investment in the energy industry In the middle of November 2014, Israel-based Delek Drilling

outlined a major upgrade programme for the Tamar gas field The development plan is linked to a letter of

intent signed between Delek and Spanish gas and electricity company Union Fenosa Gas (UFG) in May

2014, for the supply of 70bn cubic metres (bcm) of gas over 15 years to Egypt's Damietta LNG

terminal The Tamar upgrade plan is estimated to cost between USD1.5bn and USD2bn, with a target ofnearly doubling production capacity to 20bcm once complete We project fixed investment to contract by1.5% in 2014 and expand by 4.0% in 2015, and to grow by 4.5% on average over the next five years

Promising Investment Opportunities

Israel - LNG Sector

Dry natural gas production, bcm (LHS) Dry natural gas net exports, USDbn (RHS)

2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 0

10 20 30

-2 0 2 4 6

f= BMI forecast Source: IEA, BMI

Net Exports: We see Israel recording net export deficits of ILS3.7bn and ILS4.5bn in 2015 and 2016

respectively, from a ILS1.2bn surplus in 2014 Exports expanded by 2.8% in Q314 due to a weakeningshekel - which lost 14.1% of its value since the beginning of August 2014 - from a sharp drop in the

previous quarter We expect total exports to contract by 0.5% in 2014 and expand by 2.0% in 2015,

primarily as the shekel will remain weak compared to levels seen in H114 A gradual improvement inmacroeconomic conditions in the UK, Belgium, the Netherlands and Germany - which accounted for 45.2%

of total Israeli exports in 2013 - will also support a return to export growth

Import growth will outpace export growth over the next few years Total imports expanded by 16.2% inQ314 from a 5.5% decline in Q214; we project the component to expand by 1.5% this year and 3.5% in thenext, on the back of an uptick in domestic consumption and fixed investment

Exports And Fixed Investment Crucial To Growth

Israel - Real GDP by Component

Private final consumption, real growth % y-o-y Government final consumption, real growth % y-o-y Fixed capital formation, real growth % y-o-y Exports of goods and services, real growth % y-o-y Imports of goods and services, real growth % y-o-y

2013 2014f 2015f 2016f 2017f 2018f 2019f

0

-2.5

2.5 5 7.5

f = BMI forecast Source: Central Bureau of Statistics Israel, BMI.

Five-Year Outlook

Increasing exports and a subsequent acceleration in fixed investment growth will lead to an acceleration inheadline growth over the next five years Growth will increase more rapidly in the latter part of the

forecast period, when we expect large-scale gas exports to begin and investment in the energy industry topick up We forecast real GDP growth averaging 3.5% over the 2015-19 period.

Risks to our five-year outlook are tilted to the downside, much the result of elevated risks to politicalstability We do not expect a long-lasting peace agreement between Israel and the Palestinians to be reachedover the forecast period, and violence will periodically resurface, which will hit business and consumerconfidence Israel will also continue to face external security threats from Lebanese Shi'a political groupHizbullah and Iran, and we cannot preclude possibility for a military confrontation over the next few years

Table: Economic Activity (Israel 2009-2018)

2009 2010 2011 2012e 2013e 2014f 2015f 2016f 2017f 2018f

Nominal GDP, USDbn 206.7 233.3 258.4 257.3 290.6 298.3 294.8 314.6 342.7 365.5 Real GDP growth, % y-o-y 1.9 5.8 4.2 3.0 3.2 1.6 3.1 3.4 3.5 3.8 GDP per capita, USD 28,415 31,438 34,261 33,664 37,584 38,141 37,227 39,193 42,079 44,217 Industrial production, % y-o-y,

ave -5.9 8.1 19.4 7.4 -2.4 -2.8 3.2 3.9 5.0 5.8Population, mn 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.0 8.1 8.3 Unemployment, % of labour

force, eop 7.2 6.6 5.4 6.7 5.9 6.1 5.8 6.0 6.0 6.0

e/f = BMI estimate/forecast Source: National Sources, BMI.

Industry Risk Reward Index

Industry Risk Reward Ratings

BMI View: MENA (Middle East and North Africa) telecoms markets are gradually moving from being

multiple-SIM and voice-centric towards being more rationalised and data-centric Differences exist

between each market, but the development of advanced data networks, such as 3G and 4G, will drive growth, as they are the main internet access technology in the region However, the security situation will always pose a threat across the development of the sector

BMI's Risk/Reward Index (RRI) Q215 table saw a number of changes this quarter, with only two countries

(Israel and Algeria) keeping the same position as a quarter ago We also added Syria and Yemen to ourindex, coming in at the bottom at the table, and their low scores have driven down the region's average forthe quarter The overall Telecoms Rating has declined from 51.2 to 48.3, while the score for IndustryRewards has decreased 3 points to 40.2, and Country Rewards 2.4pp to 61.0 A similar trend occurred forour risk indices, with Industry Risks declining 1.9pp to 45, and Country Risks decreasing 4.4pp to 55.5 It ishowever important to note that both the Country Rewards and Industry Risks indices would have remainedthe same as a quarter ago without the addition of Syria and Yemen to the RRI

This means that the main changes came from our Industry Rewards and Country Risks indices, and they hadthe most impact on the overall rankings Israel stays at the top, and alongside Iraq and Lebanon was the onlycountry to have its telecoms rating improve this quarter There is strong competition in both the fixed andmobile market, and while the full launch of 4G services, where the spectrum has just been auctioned, willcontinue to provide some growth, it is likely to do so through lower ARPU and profitability, as six operatorswon frequencies to launch LTE services

UAE and Qatar complete the podium, overtaking Saudi Arabia which drops to fourth following a 3.9pptelecoms rating decline, the largest of all countries in the index Bahrain and Kuwait swap places at fifth andsixth, and in seventh comes the largest rise from Iraq, from eleventh a quarter ago thanks to

Telecoms Rating increase of 4.2pp, the largest this quarter While Algeria remains tenth, Oman, Moroccoand Jordan all drop places because of Iraq's performance A similar trend occurred at the foot of the table,where Libya's decline, from twelfth to fifteenth, profits Egypt, Tunisia and Iran, which all move up a place.Lebanon remains sixteenth, but stops being at the foot of the table as Yemen and Syria respectively take thebottom two spots

Excluding Yemen and Syria, twelve of the sixteen countries have seen their overall rankings move frombetween 0.2pp to -1.7pp We will look at the exceptions that are Iraq, Kuwait, Libya and Saudi Arabia inmore details, but we can explain the low declines in the other countries chiefly though lower subscriptionsgrowth going forward, as the markets become saturated and move from a voice-centric to a data-centricparadigm As internet access will be mobile, we expect most subscribers to access both voice and dataservices on a single device, as ARPU will be impacted positively by higher usage but negatively by strongercompetition Bahrain has also seen its country risks index decline by 3.4pp this quarter, as civil unrest and alower economic growth will impact many sectors in the country.

Iraq OutperformsMENA Telecoms Rating Change, Q115-Q215

Source: BMI

Iraq Outperforms Its Peers

Iraq has seen its telecoms rating increase 4.2 points to 50.9, jumping at the same time four places in thetable While the political situation remains difficult in many regions as it fights the Islamic State, thecountry also found greater political stability thanks to a new cabinet But the main reason for Iraq's growthcomes from its Industry Rewards index, which increased 10 points to 52.5 in the quarter Iraq remains an

under-penetrated market in terms of subscriptions, and BMI believes the introduction of 3G services, launched by Zain and Asiacell at the beginning of 2015, will drive growth in the country This should have

a positive impact straightaway, as smartphone penetration is already high, and customers will only need toupgrade their SIM cards in order to access new data services The greater usage should in turn improveARPU, unless the operators unleash a price war to improve their market share The launch of 3G will alsoimprove overall internet access, as fixed broadband penetration remains low at less than 1%

Libya, Kuwait And Saudi Arabia Show The Largest Declines

Libya, Kuwait and Saudi Arabia are the worst performances this quarter, with their telecoms rating

respectively decreasing by 3.4, 3.8 and 3.9pp However, the reasons for their decline are markedly differentfor each

Libya has been impacted by the worsening political situation in the country, which has led to a CountryRisk score decrease of 22.5pp to 37.1 The country is on the verge of another civil war as several factionscontinue to jockey for power following the end of the Gaddafi regime Such a climate negatively impactsmany sectors, including telecoms, and this has led our decision to revise the country's rating, especially asthe market is unlikely to be liberalised in the short-term

On the other hand, the change for both Kuwait and Saudi Arabia has been led by a decrease in their IndustryRewards scores, declining by 8.3pp to 38.5 for the former and by 8.2pp to 46.8 for the latter Both countrieshave high mobile penetration led by the number of expatriates and migrant workers present in the country

But the political situation has led to a clampdown against those foreign workers, and BMI expects lower

subscriptions growth going forward through a decline in that particular segment Furthermore, competitionremains high in both markets between the main mobile operators, and the loss of migrant workers, whichwere on prepaid plans, is likely to exacerbate that trend as providers switch their focus to higher-value

postpaid users Furthermore, Saudi operators have also hit some financial difficulty recently, with Mobily and STC reporting lower profits.

Yemen And Syria Start At The Bottom

For the first time this quarter, BMI has added Yemen and Syria to its RRI, and it is no surprise to see the

two countries having the two lowest rankings, at 36.9 and 30.7 respectively Both are in the midst of verydifficult geopolitical situations, with civil wars raging, and the climate makes developments in any sector

difficult at the present However, Syria has just announced that MTN Syria and SyriaTel had been awarded

long-term licenses in the market, which should enable these operators to plan current and future investmentswith more clarity But any upside will be dependent on a strong improvement in the security situation.

Table: MENA Q215 RISK/REWARD INDEX

Industry Rewards Rewards Country Industry Risk Country Risk Telecoms Rating Rank Previous Rank

Israel 42.5 90.0 80.0 66.2 63.3 1 1 UAE 57.8 66.0 50.0 68.1 60.2 2 3 Qatar 49.5 72.0 50.0 76.3 59.1 3 4 Saudi Arabia 46.8 69.0 60.0 72.7 58.1 4 2 Bahrain 38.5 69.0 50.0 62.9 51.4 5 6 Kuwait 38.5 78.0 30.0 66.8 51.2 6 5 Iraq 52.5 57.0 40.0 47.1 50.9 7 11 Oman 38.8 60.0 60.0 62.4 50.7 8 7 Morocco 35.0 56.7 70.0 52.4 48.2 9 8 Algeria 40.0 53.0 40.0 65.2 47.0 10 10 Jordan 37.5 60.0 50.0 49.3 46.7 11 9 Egypt 40.0 43.7 55.0 53.9 45.2 12 13 Tunisia 32.5 53.3 60.0 50.4 44.4 13 14 Iran 45.0 49.7 20.0 57.7 44.3 14 15 Libya 40.0 73.3 10.0 37.1 43.2 15 12 Lebanon 26.3 63.3 25.0 45.6 38.1 16 16 Yemen 34.4 42.7 30.0 42.0 36.9 17 New entry Syria 27.5 42.0 30.0 22.9 30.7 18 New entry

Market Overview

Hardware

BMI estimates Israel's IT hardware market returned to positive growth in 2014, up 0.1% year-on-year

(y-o-y) to ILS9.225bn We forecast positive, albeit slow growth with a compound annual growth rate (CAGR) of1.5% over our five-year forecast from 2015 to 2019 In 2013 the value of hardware sales was squeezed by aweaker currency, price competition and the lower unit price of mid-range tablets hitting the market Helped

by an acceleration in private consumption growth, BMI believes that increased take-up of tablets and the end of support to older Windows operating systems boosted sales in 2014

Although BMI's country risk team believes the escalation of hostilities between Israel and Gaza in July put

a drag on GDP growth, dropping their initial GDP growth forecast of 3.2% down to an estimated 2.6% for

2014, Israel's ever growing attraction as an IT research and development hub to international firms and itsexpertise in cyber security have helped to insulate the IT sector from macroeconomic headwinds

Nevertheless, wider economic uncertainty means businesses are now investing more to increase flexibilityand realise cost efficiencies rather than expand IT hardware capabilities Moreover, lower average priceshave meant that revenue growth in most segments has lagged shipments This underpins our view of only amodest recovery in hardware sales in 2014

BMI forecasts Israel's real GDP growth return to positive territory in 2015 Private consumption is also

expected to continue growing at a reasonable pace, at an average annual rate of 3.5% between 2015 and

2019

The Israeli government has launched various initiatives to increase computer and internet penetration, such

as Computer for Every Child, now morphing into 'Tablet for Every Child' according to Israeli PrimeMinister Binyamin Netanyahu, and 'Digital Israel', a proposed initiative to streamline the digitisation ofpublic sector services, such as education, healthcare and social services The level of support, however, hasbeen criticised by some industry insiders as too low Between its launch in 1995 and June 2013, the

Computer for Every Child initiative reportedly distributed 55,000 computers in around 2,000 localities,representing a tiny fraction of total hardware sales in Israel Industry stakeholders see Digital Israel

essentially as a duplication of its Government Computing Center The centre was established in February

2012 and operates under the auspices of the Ministry of Finance, with many of the same goals as DigitalIsrael However, Carmela Avner, Israel's first chief information officer who headed the centre, announcedher resignation in December 2013 owing to the body's lack of power to implement digital initiatives

Therefore, BMI expects upgrades to new systems, Israel's vibrant local start-up and IT research &

development markets, and purchases of personal computing devices to remain the bulk of market sales.Mobile computing devices including tablets, slimline notebooks, ultrabooks and hybrids present a keygrowth opportunity for vendors as consumers increasingly complement household desktop and laptops withmore easily transportable devices Although tablet computers took longer to reach mass popularity in Israelthan other mature ICT markets, we expect demand to strengthen from 2014, further supported by an

improving private consumption outlook

Meanwhile, the end of all support for Windows XP in April 2014 and of mainstream support for Windows 7

in January 2015 is expected to result in higher sales of the Windows 8 OS in the retail and enterprisemarkets In the retail market Windows 8 will deepen the tablet and hybrid PC markets, while in the

enterprise sector the new OS should trigger computer hardware tenders previously delayed because ofweakened economic growth

Hardware Market(2012-2019)

Personal computer sales, ILSmn Servers sales, ILSmn

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 0

2,500 5,000 7,500 10,000

e/f = BMI estimate/forecast Source: BMI

Evolving Form Factors

The Israeli IT market is relatively mature, but BMI estimates that hardware still accounted for 39.5% of the

total market in 2014 (excluding communications hardware) As the market continues to mature, we expectthis to drop to around 33.6% by 2019 Prior to 2012, notebooks were the fastest-growing segment of themarket, although as recently as 2008 desktops still took around two-thirds of unit sales In 2010-2011,however 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 BMI estimates that notebooks and tablets accounted

for 78% of total PC sales in Israel in 2014, up from 60% in 2009

This trend of preference for mobility is expected to continue over the 2015-2019 forecast period Despite itsdeclining share of sales, however, the desktop sector is still significant, largely due to business and

government end-users Meanwhile, though take-up of tablets was relatively slow in Israel, the country's

consumers embraced the smartphone According to a Google survey from June 2013, around 57% of Israelis had a smartphone This chimes with BMI's estimate that 3G subscriptions accounted for around

65% of Israel's total mobile subscriber base at the end of 2013, rising to 71.7% in 2014, with mobilepenetration reaching around 127% The competition from mobile devices is driving innovation in notebookand tablet design, as slim-line and hybrid devices are increasingly the centre-piece of Windows vendorsproduct ranges

The tablet market in Israel has been dominated by Apple Although Apple has faced tough competition

from a broadening pool of tablet vendors, it managed to maintain its dominance of Israel's tablet market in

2013 In line with our expectations, Apple retained its dominance of the tablet market throughout 2014 withdata from Statcounter showing that iOS, run on Apple's tablets, accounted for 71.1% of all tablet browsingtraffic in Israel in December 2014 This was down by 8.1 percentage points (pp) y-o-y, though, with theAndroid operating system (OS) accounting scooping up market share to reach 28.1% of tablet browsingtraffic by the end of 2014 Although Statcounter data suggest that Apple devices remain by far the mostpopular among Israeli consumers, IDC estimated that Apple's share of tablet sales dropped considerably in

2013 to 31.4%, down from 49.1% a year earlier Both data support the trend of a widening range of Android

devices - including the Kindle Fire from Amazon, the Nexus 7 and 10, LG G Pad and Samsung's Galaxy

Tab range (all launched new or upgraded models in 2014) continuing to chip away at Apple's market share.Statcounter data suggest that Samsung has been the driving force behind the gradual erosion of Apple'sdominance, with its share of browsing traffic reaching 13.3% in December 2014, up from 8.3% a year

earlier All other vendors, including Asus, Acer, Google and Sony have browsing market shares below 5%,

although Asus' rose from 1.8% in December 2013 to 4.5% a year later

The gap between the strategies of some of the leading players is worth noting On the one hand Apple and

Samsung are hardware vendors and look to profit from the sale of devices, while on the other side Google

and Amazon are services firms and offer tablets almost at cost The strategies of services firms (combinedwith low cost original equipment manufacturer [OEM] tablets from China) will likely put pressure on themargins of hardware centric vendors in the medium term

However, the tablet market remains relatively undeveloped in Israel's hardware sector, which is heavilydominated by Windows machines When looking at the combined tablet and desktop/laptop computermarket, iOS and Android accounted for just 3.8% and 1.5% of total PC browsing traffic, respectively, bythe end of 2014 (this is nevertheless up from 2.2% and 0.9% of browsing traffic a year earlier) The eventwith the largest impact on Israel's PC market was the launch of Windows 8 in October 2012, which enabledWindows vendors to introduce touch devices; a number of tablets were released throughout 2013 and 2014.The addition of more vendors and another touch OS has added to competition in the market and put furtherdownward pressure on prices

Another significant development is the medium term impact on innovation and form factors Windows has atraditional strength in productivity use cases and software, with the OS being central to the enterprise

market and Microsoft's ubiquitous Office Suite There is therefore an opportunity for vendors to leverage

this strength over rival iOS and Android devices by designing tablets with strong productivity functionalityalongside the passive media consumption features Early examples were hybrid devices such as Microsoft's

own Surface (RT & Pro), Hewlett-Packard's (HP) Envy and Lenovo's Yoga and Helix Although design

innovation still has room to improve, prices have started to come down and the multi-use device has scope

to capture a share of the tablet market by offering a stronger value proposition to consumers while notcompromising on user experience In its latest earnings result, for the quarter ended December 2014,Microsoft stated that the newer Surface Pro 3 is outselling is predecessor the Surface Pro 2 by a ratio of 3 to

1, indicating that consumers are beginning to embrace the new form factor The success of lower costWindows 8 powered PCs is reflected in the latest Statcounter data, which show that Window 8 and Window8.1 accounted for almost 15.9% of browsing traffic in Israel in December 2014, up 7.7pp from 8.2% a yearearlier By comparison, Mac OSX's share of browsing traffic increased by 2.2pp, to 5.1% over the sameperiod

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

December 2014

Source: Statcounter

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 andSamsung - as well as the shift to tablets Most PC market growth in 2012 was driven by the mobile PCsegment, and in fact notebook sales declined and growth was solely driven by tablets according to researchfrom IDC IDC's data for 2012 show that laptop sales declined 16.4% from 2011 to 2012, falling to around427,000, in contrast to a 20.2% increase in tablet sales to around 226,000 In the laptop market Lenovo leapt

to top spot with a market share of 21.2%, overtaking HP and Dell In second position was Asus with 16%market share, also overtaking HP and Dell which both had 15.2% market share in 2012

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

unit in 2005, and through increased investment into the country In 2012, Lenovo claimed that it had topspot 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 andapplications In September 2014 Lenovo's senior vice president met with hundreds of Israeli start-ups andsuggested that the company was considering establishing a research and development (R&D) centre in thecountry

Lenovo is far from the only multinational PC vendor to be increasing its R&D investment in Israel In 2012Apple opened a research centre in Haifa and in December 2013 it opened its third Israeli research centre in

Ra'anana Dell set up an R&D centre in the country in 2011, Toshiba announced plans to open one in early

2014 In 2013, Samsung announced it would open of its three global innovation and strategy centres inRamat Gan, Israel (the other two are in Silicon Valley and South Korea)

Software

BMI estimates that Israeli software spending increased to ILS5.87bn in 2014, up 6.2% y-o-y We expect

growth in the software segment to accelerate, with a CAGR forecast of around 6.5% over the five years to

2019 In the past few years, there has been a pick-up in demand for systems and upgrades in public andprivate sectors, with investments by government organisations such as the Israeli Ministry of Defense andIsraeli Police, and from utilities leader Israel Electric Company Much of this growth is related to increasinguse of cloud services and related rising demand for security services

In 9M14, leading software vendors in the Israeli market reported steady, single-figure growth, much in line

with our forecast Leading Israeli software and services group Formula Systems-owned Matrix, which

derives most of its revenues from the Israeli market, reported 7.9% revenue growth during 9M14 (seeMatrix Company Profile for further details)

Opportunities for software vendors in Israel exist across a range of sectors; from government to energy,financial services, telecoms and utilities Major customers for software solutions in Israel include large andmedium enterprises such as commercial banks, loan and mortgage banks, credit card companies, insurancecompanies, telecoms service providers, hi-tech companies, and the Israeli Defense Forces, 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).

Meanwhile, the small- and medium-sized enterprise (SME) segment, the mainstay of the Israeli businesssector, has emerged in recent years as an important growth area for enterprise systems The SME sector will

become increasingly important in 2015, as the government cuts on non-essential spending in order toservice debts relating to the June-August war with Gaza SME spending on enterprise solutions shouldcontinue to grow steadily, with reviving or emerging areas of opportunity including security, customerrelationship management (CRM) solutions and business intelligence.

Software Market(2012-2019)

Software sales, mn

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f

0 2,500 5,000 7,500 10,000

e/f = BMI estimate/forecast Source: BMI

Migrations to the Windows 8 operating system are believed to have had a positive impact on 2013 and 2014sales Microsoft touted the touchscreen capabilities of Windows 8 and Q412 saw the release of a new wave

of Windows 8 tablets and notebooks Following several upgrades to the Surface Pro, in January 2015Microsoft announced the Surface Hub, an 84- or 55-inch multi-touch and multi-pen 4K wall mountedscreen device, aimed at business users, and which will run the newest Windows 10 OS A large majority ofIsraeli computer users have already switched away from Windows XP, which dropped as a share of

browsing traffic from 19.4% to 10.3% over the 12 months to December 2014, to Windows 8/8.1, which sawits share increase by 7.7pp to 15.9% over the same timeframe Nevertheless, Windows 7 remains by far themost popular OS, accounting for 60.8% of browsing traffic in December 2014, down by just 2.6pp y-o-y

according to Statcounter data BMI believes the trend will continue throughout our forecast period, with

consumers and businesses only gradually migrating to the Windows 8/8.1 OS

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 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 utilities manageresources more efficiently through use of big data and analytics technology The analytics technology was

developed by IBM in Israel.

The security software segment is one of the fields with the greatest opportunity in Israel, potentially worthhundreds of millions of dollars over the medium term as awareness of security issues grows in tandem withthe rise of cloud computing Owing to the country's geopolitical situation, Israeli companies, organisationsand the government are highly sensitive to cyber threats, and local IT firms have responded to the

heightened demand by developing some of the world's most advanced IT security software BMI believes

research and spending is likely to continue across all software segments, although with security content andthreat management remaining the current priorities

In October 2012 Israel's Prime Minister Binyamin Netanyahu announced that the government was working

to create a 'digital Iron Dome' to protect vital infrastructure from hackers and viruses (the Iron Dome isIsrael's anti-rocket defence system) This included the establishment of the National Cyber Bureau to defendthe nation against computer terrorism This policy should see vendors win public contracts, while alsoserving to focus the minds in the private sector, although at the time of writing no major contracts had beenpublicly announced In October 2014, Netanyahu announced further plans to establish a National CyberDefense Authority, which will protect civilian cyberspace as well as vital security facilities

Due to its sensitive geopolitical position and supported by its well-educated population, Israel has a vibrant

domestic cyber security market Check Point, Imperva and CyberArk are listed companies, while in March 2013 Israeli security services company Incapsula, an Imperva subsidiary, was valued at around

USD950mn after proving successful among SMEs Incapsula provides high-end firewalls to assess

incoming traffic and identify possible bugs Incapsula was established in 2009, created by three Impervaemployees

The growing emphasis of many multinational IT vendors on software and services revenues has led several

of them to direct more investment into R&D at the Israeli market In June 2014, Israeli security analytics

company Fortscale announced that it raised USD10mn in funding from Intel Capital and Blumberg

Capital to expand its R&D program Also in June, cyber security start-up Hexadite announced a

USD2.5mn in seed funding for its operations

In July 2014, Microsoft, cloud services provider Akamai Technologies and Jerusalem Venture Partners

(JVP) collaborated to work on a cyber security accelerator The move is in line with Microsoft's effort toprovide start-ups with a programme and market expertise to aid them in accelerating their business and tocreate milestones in cyber security At the end of the programme, one of the cyber security start-ups will beprovided with an investment of USD1mn Earlier in 2014, IBM also announced plans to open an IT security

centre in Beersheva, while Cisco and Lockheed Martin both announced plans to increase their investments

in the development of the country's IT sector

Israel's strong reputation as a hotbed for innovative software development has made Israeli companiespopular takeover targets for multinationals In September 2013, IBM completed its acquisition of Israeli-US

enterprise security firm Trusteer, for an estimated USD1bn Trusteer's customers reportedly include seven

of the top 10 US banks and nine of the top 10 UK banks More recently, in April 2014 US-based Palo Alto Networks confirmed its acquisition of Tel Aviv-based Cyvera, which has developed software to protect

computers running Windows software, including ATMs, from unknown, zero-day cyber attacks Palo Altodid not confirm the value of the transaction, but industry experts estimated it at around

USD200mn 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 andcloud computing SAP is developing 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 Given the current focus of many businesses on controlling costs, the

pay-on-demand software-as-a-service (SaaS) model has grown in popularity and spread beyond the initial coreapplication area of CRM New cloud computing offerings and increased competition in this segment shouldfuel further demand from users As well as cost savings, businesses will look to boost efficiency andincrease flexibility of response to customer needs Large businesses are most likely to put IT applicationssuch as mail, phone systems and document management into the cloud However, enterprise applicationsthat require a high level of customisation, or which are subject to regulatory or data-sensitivity constraints,are more likely to stay on premise