Israel Information Technology Report Q4 2012

BMI View: Israeli IT spending is expected to reach US$6.0bn in 2012, up 5%. In Q112, severalindicators suggested moderating consumer demand, but vendors still reported a solid tradingenvironment for IT services across industrial, government, defence and financial services segments. Thecurrent rate of PC penetration, while high for the region, represents potential for organic growth.Household penetration is estimated at around 75%. The Israeli IT market should gain enough momentumfrom key sectors to expand at a CAGR of 7% over BMI's 2012-2016 forecast period, due to momentumfrom key segments.

Headline Expenditure Projections

Computer Hardware Sales: US$2.5bn in 2011 to US$2.6bn in 2012, +3% in US dollar terms. Forecastin US dollar terms downwardly revised due to macroeconomic factors, but Israeli businesses are investingmore to facilitate expansion and development.

Software Sales: US$1.3bn in 2011 to US$1.3bn in 2012, +6% in US dollar terms. Forecast in US dollarterms downwardly revised due to analyst modification, but device and data proliferation will drivespending on customer relationship management (CRM), databases and business intelligence.

IT Services Sales: US$2.0bn in 2011 to US$2.1bn in 2012, +6% in US dollar terms. Forecast in USdollar terms downwardly revised due to analyst modification but key segments such as government anddefence will be a continued source of opportunities.

Risk/Reward Ratings: Israel's IT rating score was 66.3 out of 100.0, up on the previous quarter. Israelhas regained first place in our latest RRR table, ahead of both Qatar and the UAE.

Key Trends & Developments.

BMI forecasts overall solid growth for the Israeli IT market for 2012, despite a deterioratingexternal economic environment. Businesses will maintain a cautious attitude to IT investmentsdue to uncertainty about a sustainable global economic recovery in key export markets. Thereshould, however, be growth in areas such as business intelligence, server virtualisation, mobiledevices and cloud computing.

New cloud computing offerings and increased competition in this segment should fuel furtherdemand from users. Particular areas of opportunity for cloud computing include banking andretailing as organisations in those fields look to save money on hardware investments.Businesses will, not only seek to make cost savings, but will look to boost efficiency andincrease flexibility of response to customer needs.

The growing emphasis of many multinational IT vendors on software and services revenues, hasled companies like Dell and SAP to direct more investment in R&D at the Israelimarket. However Israel's domestic IT service companies have strong advantages owing to localknowledge and contacts. For example, Ness Israel's long-term relationship with the IsraeliDepartment of Defence makes it a strong player in the defence and homeland security vertical.Despite their global ambitions, Israel remains an important market for these companies andtypically accounts for 40-50% of revenue.