Camtek Ltd (CAMT)

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Camtek’s comeback

CEO Rafi Amit: In retrospect, we were geniuses… You could call it luck.

Gitit Pincas 16 Jan 06 15:29

There are decision-making processes, crossroads you pass through, that when you look back on them, make you feel like patting yourself on the back for the results. In some cases, it was a matter if decisions required that courage and foresight. Others were simply a matter of luck, although under the second scenario, you could certainly attribute the success to yourself. Why not? No one will argue.
One of the Israeli companies that made a strong comeback in recent quarters is Camtek Ltd. (Nasdaq: CAMT; TASE:CAMT), in which Prior-Tech Ltd. (TASE:PRTC) owns a 77.7% stake. By using the world “comeback”, I do not mean to underestimate the hard road Camtek still has to travel in its markets, from rehabilitating its image on the capital market to proving that it can achieve high growth and profit rates. Nevertheless, the road the company has already traveled is worthy of note. In Camtek’s case, it seems, a combination of both things - correct decisions that took courage, and a little luck - brought it to where it is today.

“Today, everyone can analyze our situation and see that in retrospect, we were geniuses, and compiment us for our superb decision-making process,” Camtek chairman and CEO Rafi Amit told ''Globes'' in a telephone interview from Thailand on Friday. “Fair? Not really. We sometimes found ourselves operating with zero visibility, and we had no idea what we’d sell the next month. It was necessarily a matter of a lot of hunches and timing. You could call it luck; I say that if you live right, things go well.

“It might sound rather mystical, but that’s how it is. We invested great effort, gambled, and even if we had wanted to prepare a fantastically optimistic scenario, we wouldn’t have believed it possible. What happened in the past few quarters is that our new product, the Falcon, was good and ready to be installed. The product’s target market also improved, along with the industry as a whole. At the same time, our main competitor in our new market that we entered in August fell asleep on watch. So now, early 2006, we’re at a real turning point.”

It would be no exaggeration to state that the market had given up on Camtek. The company could have been an ephemeral episode on Wall Street. In 2003, for instance, Camtek’s share fell below $0.30, and the company was struggling on many fronts: growth that wasn’t always coming, and when it did, wasn’t at the hoped-for rate; the bottom line was written in bright red, and when profits came, they were nothing to write home about; and an attempt to win back institutional and other investors.

Camtek’s share was falling, and it seemed at the time that the company’s founding decision to compete against gorilla Orbotech Ltd. (Nasdaq: ORBK) was not the wisest decision ever taken at Camtek’s offices in Migdal Ha’Emek.

Camtek develops and manufactures automated optical inspection (AOI) systems for the high-density interconnect substrates (HDI-S), printed circuit board (PCB) semiconductor manufacturing and packaging industries. Until a year ago, last put, semiconductors did not exist. This arm was the reason why investors became interested in the company again.

Camtek’s market cap is now $140 million, after rising 70% since the beginning of November 2005, and trading volume in the share has risen to hundreds of thousands of dollars. In the hard times of 2003, a day in which no shares at all changed hands was not unusual. First Israel Mezzanine Investors Fund (FIMI), run by general manager Ishay Davidi, thought there was a potential upside, and lent Camtek a $5 million loan in August 2005. If FIMI wants, the loan is convertible into ordinary shares of Camtek, at a conversion price of $5.50 per share, which compares with a share price of $3.60 when the loan was announced.

As a result, Camtek is beginning 2006 with a tail wind from a slew of positive announcements, including several million dollars in contracts for Falcon silicon wafer inspection systems. The most recent announcement was on January 5, when the company predicted $20-23 million in revenue for the first quarter of 2006. All of a sudden, Camtek was talking about “orders backlog”, which had not been a characteristic of the PCB industry. Camtek posted a net profit of $1.5 million on $7.7 million in sales for the third quarter of 2005. The company predicts $85-95 million revenue in 2006, reflecting 35-55% growth.

“This is a turning point,” says Amit. “Snce we were founded, we’ve only been in the PCB and HDI-S sectors, where we faced very tough competition. Orbotech is a large company, but what doesn’t kill you makes you stronger, and this competition forced us to become better. Orbotech is an aggressive company, and our ability to take bites out of its market share is very limited. I think that the tough competition, and the attempt to drive us out of the market through aggressive competition, forced down prices and actually made the market smaller.” He said the price for Camtek’s systems for the sector had fallen from $500,000 each to $150,000-200,000.

Amit says the PCB industry is not dying, but is one of the most stable industries around, with constant 9-10% annual growth. “On the other hand, sums haven’t been invested in PCB. For the sake of comparison, $1.5 billion is invested in a semiconductor fab; an investment in a PCB fab is $30-50 million. It’s not the same level of equipment.”

Amit and his wife have resided in Hong Kong for the past three years. “80% of our market is in the Far East, which is why I must be here,” he says.

Camtek has always claimed that it and Orbotech control 90% of the market, shared equally. How is this possible? After all, Orbotech reported $37.3 million in revenue from the PCB industry, at least double Camtek’s revenue.

Amit asserts that the two items in each of the companies are not comparable, because Orbotech includes other things in this item, such as platforms and peripherals. “I would say that we have a 50-50 share in all markets, except for Korea and Japan. There’s no real way to check this, but we know about every deal made, and each month, we analyze how much we made, and much they and other competitors made. This is how we arrive at the calculation that we’re roughly equal in terms of market share,” he says. That’s one way of doing it.

Amit may have learned over the years how to live with competition from Yavne-based Orbotech, but it should be noted that both companies are involved in a complicated legal dispute. We won’t bother you with the twists and turns of the legal saga between the two companies in various Israeli courts. Progress has been slow. Suffice it to say that Orbotech accuses Camtek of patent infringement, while Camtek alleges that Orbotech sabotaged Camtek’s planned $40 million issue in May 2004. “The court will make its decision,” says Amit. “Each party believes that it is right.”

The competition between the two companies has known ups and downs, dirt, and much emotion. Amit says the legal front is quiet at the moment. “Both Applied Materials Inc. (Nasdaq:AMAT) and KLA-Tencor (Nasdaq:KLAC) would have fought to win back market share. This is not unique to us. A company usually does one of two things: either it buys the competitor or it fights back. It does not remain indifferent.

“Orbotech developed systems that are now similar to ours in performance and price, but things are now fairly calm between us. I think that a contributing factor to this is the fact that fabs often want to diversify among equipment vendors. Another reason is that we’re very advanced in the semiconductor sector, where Orbotech has no presence.”

For a long time, you’ve cast eyes at each other. Can you imagine a scenario in which you link up in some way in order to cut costs? Maybe something along the lines of Orbotech’s link with Valor Computerized Systems Inc. (XETRA:VCR) in software for designing PCBs, not to mention an outright acquisition?

Amit: “This is apparently a characteristic of competing Israeli companies. They combine forces only in conditions of cardiac arrest; the brain doesn’t work otherwise. Every analyst and investor looking at the situation asks something along these lines. We’re asked why we don’t merge or cooperate in any way. But then they ask questions like the price tag, the valuation for each company, who will be in control, and other problems of ego. It ultimately degenerates to the level of personalities at the head of organizations. While it might be desirable from a practical standpoint, maybe a new generation has to emerge both with us and with them.”

As an aside, we ought to mention market rumors that Orbotech president and CEO Yochai Richter might leave the stage in favor of one of the company’s three presidents. We’ve not been able to get a response from Orbotech on this matter.

FIMI and Ishai Davidi are wonderful

Camtek’s most critical decision was probably to enter the semiconductor sector. “Beforehand, all our eggs were in the PCB market, where competition is fierce and powerful. In the semiconductor industry, in contrast to what quite a few investors think, we don’t compete against Applied Materials or KLA-Tencor. We’re positioned at the end of the silicon wafer production process, and as a finished product, we accompany wafers until installation on a platform,” says Amit.

“Our strongest competitors in this sector are August Technology Corp. (Nasdaq:AUGT) of the US, but its acquisition by Rudolph Technologies Inc. (Nasdaq:RTEC) (for $190 million - G.P.) initiated a lot of deal-making in the field, causing August Technology’s market power to decline. The merger will take a year, including adjusting balance sheets and counteroffers. This is fortunate for Camtek; sometimes a little luck is needed.”

Amit admits that Camtek tried in advance to iron out possible wrinkles with August Technology. “When we entered the market, it was said that we knew the story - just like with Orbotech - and we ought to be smart in advance, and first talk with them in order to examine different directions. But August Technology was a company without strong management; it was mainly run by parties at interest who were looking for a fast exit. Nothing came of it in the end. It’s to Orbotech’s credit that its executive are fighters; veterans of IDF commando units. After we survived basic training with them, everything else was easy. When Orbotech is about to lose a contract, its entire management gets down to work. August Technology apparently has fewer fighters. We expected more of them.”

August Technology is also suing Camtek for patent infringement, an allegation that Camtek denies.

Orbotech is focusing on the medical sector. Does that industry interest you?

“I have no idea what exactly they’re doing in the medical sector. Obviously, we’re not as big as they are, and we mustn’t disperse our efforts into every direction, especially if we want to achieve high multiples in 2006.”

What would have happened to Camtek if you hadn’t entered the semiconductor industry?

“Oy, that’s really hard to assess. What is certain is that we’d be a much smaller company. After all, in 2006, we expect equal revenue from our two main markets (semiconductors and PCBs), which means we’d be half the company we plan to be in 2006. The microelectronic market wouldn’t be open to us. This is a huge market with many applications. We suddenly have orders for months in advance - our ultimate vision. This is an industry with higher multiples. Within a fairly short time, Camtek can become a company with $100 million in sales, a real jump in magnitude for us.”

You have $14.7 million, including a credit line from the banks. That doesn’t seem a lot. Have you considered an issue?

“We recently obtained $5 million from FIMI. Ishai Davidi and FIMI are marvelous investors, and made a good investment decision. Look where our share is now ($5.10), compared with where it was when they bought in ($3.60). In addition, Camtek generates cash flow from activities, and the banks have increased our credit line.

“As for a public issue, we once wanted to raise money on Nasdaq. There was a lot of talk about this issue, but we failed. Our case showed that it’s possible to spend $1 million on issue expenses with a lot of risk, and issue that in the end didn’t take place.

“Another option is a private placement. We’ve always felt that we’re priced at a discount, but in the past two months, with God’s help, the share has started to move, so have good reasons for optimism. We want to give investors a profit, so we won’t raise money at a peak, but when we’re close to a point at which it’s necessary to give it more serious thought. The moment the share reaches a more realistic value, we can consider mergers and acquisitions at better terms. After all, what could I have offered in a deal until now? A share worth $3?”

Published by Globes [online], Israel business news - www.globes.co.il - on January 16, 2006

http://www.globes.co.il/serveen/globes/DocView.asp?did=1000050986&fid=980

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