Transmeta soars in initial public trading

Shares of Santa Clara, Calif.-based Transmeta climbed $24.25, or 115 percent, to close reguar trading at $45.25 a share. With 127.7 million shares outstanding, the company had a market capitalization of $5.8 billion.

Vincent Slavin, who tracks IPOs for Cantor Fitzgerald, said the strong debut matched expectations.

"It's been a highly anticipated IPO in the face of the other junk or garbage that's been coming out," he said. "It's a real product, not an idea or a dot-com."

Transmeta's IPO gained an even greater buzz when it raised its price range to $16 to $18, from $11 to $13.

When 13 million shares were sold Monday to institutional investors and fund managers, the price had climbed to $21, a sign of very strong investor demand. The sale, which was handled by Morgan Stanley Dean Witter and Deutsche Banc Alex Brown, raised approximately $273 million for Transmeta.

The company designs microprocessors for notebooks and Internet devices that consume less power than competing processors from Intel and Advanced Micro Devices. So far, companies that plan to incorporate the company's so-called Crusoe chip into their products include Sony, NEC, Fujitsu, Gateway and Hitachi.

While the company's lofty customer list has excited investors, Transmeta has recently had to contend with a spate of less-than-positive news.

Analysts have said that recently released benchmarks indicate the company's Crusoe processors don't provide substantial power-saving advantages over current Intel chips. IBM also said last week that it has suspended plans to build a Crusoe-based ThinkPad notebook.

The overall performance of Transmeta's chips has been a hotly debated topic, and one that has been exacerbated by the fact that few Transmeta notebooks have been released. Insight 64's Nathan Brookwood speculated that the IBM cancellation could have been related to uninspiring performance. Intel has also been accelerating mobile processor development, which detracts from Transmeta's potential market, added Linley Gwennap of the Linley Group.

Despite the IBM decision, other manufacturers are still plugging ahead with Transmeta-based projects in select markets. Compaq is working with the chip company on a device for the Asian market, sources close to Transmeta have confirmed. Last July, sources at Compaq Asia said that the company was developing a Crusoe notebook, although officials at Compaq's U.S. headquarters said the company had yet to make a final decision on a Transmeta product at that time. Like Sony and Gateway, Compaq is an investor in the company.

IBM refused to comment on the issue. A Transmeta spokesman, however, refuted such claims. "We can say with certainty that it had nothing to do with the performance of Crusoe," the spokesman said.

The cash conundrum
Like a number of start-ups, Transmeta is not profitable. In the first nine months of 2000, the company lost $71.1 million dollars and pulled in $3.8 million in revenue. In 1999, Transmeta lost $41.1 million. Since it began in 1995, the company has lost approximately $147.5 million, according to documents filed with the Securities and Exchange Commission.

Currently, more than half of the company's product revenue comes from a contract with Sony. Sony accounted for 50.2 percent of Transmeta's product revenue, while sales to Fujitsu accounted for 20.3 percent.

Before this year, the company's main revenue came from license fees from IBM and Toshiba. Both companies had licenses to manufacture Crusoe-like processors. Transmeta, however, later bought the rights by agreeing to pay IBM $38 million over four years and give 1.2 million shares of stock to Toshiba.

Currently, IBM is the sole manufacturer of Transmeta microprocessors, but starting next year, chips could be made by Taiwan Semiconductor Manufacturing Corp. (TSMC).

"We recently qualified TSMC in Taiwan to fabricate wafers for Crusoe microprocessors. We expect TSMC to be operational for fabrication of wafers in production quantities during 2001," the company said in SEC filings.

As reported earlier, collaboration with TSMC could become a major factor, as well as a possible legal liability, in Transmeta's future. TSMC charges less than IBM for manufacturing processors, so working with TSMC could improve Transmeta's margins. On the other hand, IBM has an extensive cross-license with Intel that virtually insulates Transmeta from any legal actions from the chip giant. TSMC does not.

Transmeta holds six U.S. patents and has filed applications for 31 more. The patents primarily cover microprocessors, software and components for microprocessors.

SEC documents also revealed that the company recently entered into distribution agreements with Siltrontech Electronics and All American Semiconductor to distribute Transmeta products in, respectively, Asia and North America.