In contrast to many foreign technology companies that have been looking for ways to reduce their activities in Israel in recent years, KLA-Tencor Corporation (Nasdaq:KLAC), is hiring in Israel. "Forbes" ranks KLA-Tencor, a manufacturer of equipment for the processor and semiconductor industry, in 1,217th place of the world's 2,000 largest companies. The company's center in Migdal Ha'Emek currently has 250 employees, and had $70 million in sales in 2004, according to its financial reports. That is reason enough for KLA-Tencor CEO Kenneth L. Schroeder to visit Israel.
KLA-Tencor has had a center in Israel for 19 years. It was one of the first R&D and manufacturing centers of a foreign high-tech company in Israel. KLA-Tencor co-founder and chairman Kenneth Levy is a committed Zionist, and urged the company to set up the center in Migdal Ha'Emek. Levy makes sure to visit Israel every three months. He has personally invested in high-tech companies, including Saifun Semiconductors, PowerDsine (Nasdaq: PDSN), Scitex Vision, and Genoa Color Technologies, and in Israeli venture capital funds, including Evergreen Partners and Gemini Israel Funds.
KLA-Tencor Israel is a separate business unit within the corporation that is developing a lithograph and etch process optical inspection system for silicon wafers. A year ago, KLA-Tencor established a second center in Israel, KLA-Tencor Comet, at an investment of $4 million, which answers directly to the company's headquarters in the US. KLA-Tencor Comet is developing an optical measuring platform.
For the 2004 fiscal year (July 2003-June 2004), KLA-Tencor posted a net of $244 million on $1.5 billion in revenue, compared with a net profit of $137 million on $1.3 billion in revenue for the 2003 fiscal year. The company's circumstances continued to improve in the second half of 2004 (the first half of its 2005 fiscal year): it posted a net profit of $238 million on $1.05 billion in revenue, 60% more than in the second half of 2003.
KLA-Tencor had $992 million in cash and cash equivalents at the end of 2004, which will help it buy back shares. The company's current market cap is $8.85 billion, after a recent 17% drop in its share price.
Planning for an industry slowdown
A recent Gartner group study predicted a decline in business for semiconductor equipment makers in 2005. Gartner says global equipment sales totaled $37.6 billion in 2004, but will fall to $33.2 billion in 2005.
"Globes": How are you preparing for the slump in sales?
Schroeder: "2004 was an excellent year for equipment makers for the processor and semiconductor industry. 2003 was a better year than 2002, which was better than 2001. After three good years, we expect a slowdown. We predict that 2005 will be a year during which our customers will install new equipment bought last year."
Schroeder says KLA-Tencor is constantly investing in the development of new products, and will increase development this year. "We're in a cyclical business. New products will generate future growth. At the same time, this year we'll focus on streamlining and examining moving to areas where we can operate at lower cost."
Is it worthwhile to continue maintaining a development center in Israel for this field? Tower Semiconductor (Nasdaq: TSEM; TASE: TSEM) is located across the street from you, serving as a reminder of the difficulties you're liable to face in this field.
"That's a hard question to answer. Intel (Nasdaq:INTC) has had successes in the semiconductor industry in Israel. It's true that others have been less successful, but that's true for the entire field. We've been lucky in the sector of equipment for the semiconductor industry in Israel."
"We'll invest in information management companies"
Does your Israeli center face competition from cheaper places?
"Like any company, we're constantly examining the issue of streamlining and cost-cutting. We have 300 employees in India, some of whom are employed directly, and others through subcontractors. This is efficient for us. We have 40 engineers in Shanghai and 15 employees in Russia, directly employed by KLA-Tencor. We have 250 employees in Israel. We're still looking at other places, but we have no good reason at the moment to reduce our activities in Israel, which has become a successful and profitable business division. Costs in Israel are still two-thirds less than in the US. In addition, over the years of the Israeli center's activity, we've consolidated the team's professionalism, and it would be very expensive to move it. We have a creative and stable workforce in Israel, and we have no competition in Israel in our field."
What about Applied Materials (Nasdaq:AMAT)?
"Applied Materials competes against us in the US, not in activities carried out at the center in Israel."
Do you utilize the Chief Scientist's programs?
"We've used allocations from the Chief Scientist in the past, and even paid royalties on them. I think that the money we received from the Chief Scientist was insignificant, compared with, for example, our spending on salaries in Israel. I think that the programs for encouraging foreign companies are good, but they don’t attract us at this stage."
What about acquiring Israeli companies?
"We have no plans at this time to acquire Israeli companies, even though mergers and acquisitions is at the heart of the company's strategy. KLA and Tencor were originally two companies before they merged. However, we make investments through the company's venture capital arm, which has been operating for four years. We also invest outside the US, mainly in Asia, and we definitely consider investments in Israeli start-ups."
What companies do you invest in?
"In companies in our fields of activity, and in information management and storage companies. We offered to acquire Nova Measuring Instruments (Nasdaq: NVMI) a few years ago, before it went public, but they rejected our offer."
Many large corporations that established venture capital arms during the bubble years, quickly closed them. Will you persist?
"We made our decision at the height of the bubble, and we've decided to continue this activity. If we were to close this activity at this stage, we'd definitely lose financially. It's hard to say at the moment whether we'll make a profit in the future or not. In any event, we've derived great advantages from our venture capital unit, because we've been exposed to new technologies and learned about new fields through our portfolio companies."
Published by Globes [online], Israel business news - www.globes.co.il - on April 18, 2005