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2HRS2GO: Transmeta off to a good start

    COMMENTARY -- Transmeta (Nasdaq: TMTA) says its chip technology can save California.

    If you follow the news, you know about the power crisis afflicting us on the West Coast. Government regulators have resorted to rotating blackouts across the state to save power and prevent a total collapse. I'm saving often as I write this in San Francisco -- our office manager says this block is due for a blackout sometime in mid-morning.

    Power shortages create an unpleasant situation for consumers and small businesses, but they provide a fitting backdrop for first quarterly analyst call for Transmeta.

    "This is particularly appropriate today," CEO David Ditzel told analysts yesterday. "We here in California are suffering from an acute electrical shortage. Part of that shortage is due to the increased use of power by computers."

    Ditzel cited a guesstimate that computers consume 12 percent of all power used in the United States. It wouldn't be unreasonable to suppose that percentage increases at least slightly in California, given the presence of Silicon Valley.

    Enter Transmeta, whose Crusoe processor is designed specifically for low power.

    "Before I begin, I'd like to take just a minute to bring you Our Vision For Transmeta..." said Ditzel, who went on to occupy the next five minutes. "We thought it would be worthwhile to explain a little about why Transmeta is here today. Six years ago, the founding team at Transmeta blah yadda yap yap..."

    Memo to Ditzel: the audience for your conference call already knows about the company, or else it wouldn't be listening in the first place.

    This was Transmeta's inaugural conference call, so executives may have felt the need for added background, not to mention the word "vision" four times in the first five minutes. We got the picture -- Transmeta is new and its focus on power opens up all sorts of markets.

    That's why the most interesting part of Transmeta's call was the technology discussion. Normally when company executives go through their "accomplishments" for the quarter, you can get a cup of coffee and come back in time for the CFO to start detailing the part that really matters to investors: earnings guidance.

    But don't read too much into Transmeta's financials or the larger economy. Transmeta, which has barely started mass shipping Crusoes, remains an R&D company, for the most part.

    "It'll be a long time before I worry about rising oil prices affecting corporations' discretionary spending on IT," jokes analyst Brian Alger of Pacific Growth Equities, which until today was the only non-underwriter research firm covering Transmeta.

    Design wins and target markets matter the most. By those metrics, Transmeta is doing well: 10 items powered by Crusoe were selling at the end of December, and the company expects that figure to increase 50 to 70 percent in the current quarter.

    Most of those products are notebook PCs of one sort or another. It's a good market, but also one with two companies -- Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD) -- far ahead of Transmeta in market share.

    The larger opportunity for gold is in new fields, and Transmeta probably has more than you suspect. You're probably aware of Internet appliances, devices narrowly designed for online access. Transmeta made a big deal last year about the Crusoe-powered desktop appliance from Gateway (NYSE: GTW) and America Online.

    What you probably didn't know until this week was that Transmeta has other, non-mobile markets in its sights. It's easy to see why low power chips are useful for battery-dependent laptops. The benefits of low power are less obvious in a field such as servers.

    Transmeta says it has been approached by many companies looking to build low power servers, because Crusoe's design lets a manufacturer pack hundreds of processors into a small space, said Mark Allen, president of Transmeta. A Crusoe-powered server also throws off less heat, compared to other chips. One start-up, RLX Technologies, plans to use Crusoe for densely-packed servers for website and application hosting centers.

    That's the kind of thing that has analysts excited. "I am absolutely encouraged by the potential of these Web servers," Alger says.

    Granted, that sounds like the same kind of talk that surrounded every tech start-up and dot-com wanna-be during the Internet bubble. We all know what happened to that one.

    And Transmeta already trades at more than 148 times estimated earnings for 2002.

    But Transmeta was never for the faint-of-heart -- buying into any technology start-up requires a willingness to risk a lot for a big reward. If you're in it, all you want to hear from these conference calls is that everything is on track. So far it is.

    Just don't expect Crusoe to bail out California's utilities anytime soon. 22GO>