BMI View: Israel's vibrant ICT start-up community and highly skilled tech workers have continued to attract high levels of investment in 2015, following a record breaking year in 2014 . We expect this trend to continue, as global IT firms look to leverage innovative solutions emerging from Israel's start-up ecosystem to accelerate their transition towards high-growth software and services such as cloud computing and big data analytics.
Nevertheless , 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 it s geopolitical location and the uptick in violence in the region in 2014 and 2015 , we expect spending on cyber security to be a key driver of growth, contributing to software and services' increasing share of IT sales over the five years to 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 upgrades to the Windows 8 and Windows 10 operating systems.
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 increased spending 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 in terms of growth, but it will be stable sectors such as government and defence that continue to account for the majority of spending.
Key Trends And Developments
Data from Israel's Office of the Chief Scientist (OCS) show that the high-tech sector declined as a proportion of GDP between 2007 and 2012, a trend which we expect to continue throughout our forecast period, albeit at a more gradual pace. However, the outlook for Israeli IT vendors and start-ups remains strong, as they report strong revenue growth and continue to attract strategic investment from global IT firms.
One particular area of Israel's IT market that has attracted attention in 2015 is content monetisation. Taboola and Outbrain are market leaders in embedding recommended links to articles, videos and lists (think '10 Best Vacation Spots In Cuba', for example) into clients such as Fox News and Rolling Stone's websites. In February, Taboola closed a USD117mn funding round, which reportedly pegs the company's value at nearly USD1bn. In October 2013 Outbrain raised USD35mn in funding and in 2014 filed with the US SEC for a Nasdaq IPO, which would reportedly give it a valuation of around USD1bn if it goes ahead with its plans. Meanwhile, software download and installation specialist, IronSource, recorded revenue of USD250mn in 2014 and closed a pre-IPO funding round of USD105mn in February, which it will use to fund acquisitions and reportedly values the company at well over USD1bn.
Global firms also continue their investment, with Infosys revamping its operations in Israel with a USD100mn budget to invest in or acquire Israeli start-ups, Facebook including Israel-based Magisto's Shot app into Facebook Messenger, PayPal's acquisition of CyActive ahead of the launch of a security centre in Israel, and SoftBank Ventures Korea and Akamai Technologies' strategic investment in mobile NFV (network function virtualisation) software specialist Saguna.
One of the main reasons behind these investments is to enable global firms to tap into Israel's highly skilled IT labour force. Israel's Central Bureau of Statistics estimates there were around 145,000 jobs in the ICT services industry at end-2013. The continued entry of global IT firms will add to the number of ICT services jobs, but in a country with a total working age population of 4.8mn in 2014, the pool of skilled workers is limited. It is therefore unlikely the level of investment will remain as high over the longer term, once the most attractive start-ups and experienced tech workers are bought up and hired by global firms.