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Investors hammer Transmeta

The chipmaker's stock is pummeled after the company says second-quarter revenue will fall as much as 45 percent from the first quarter.

    Shares of Transmeta were pummeled Thursday after the company issued a revenue warning and analysts downgraded the stock.

    Transmeta, which makes power-saving chips for notebook computers and Internet appliances, closed down $7.24, or 57 percent, at $5.36.

    Transmeta said second-quarter revenue would be down 40 percent to 45 percent compared with revenue of $18.6 million for the first quarter of 2001. That would put revenue around $10.2 million to $11.2 million. First Call's estimate had predicted revenue of $19.6 million. Transmeta blamed economic weakness in Japan, its primary market.

    CEO Mark K. Allen said in a conference call Thursday that one of Transmeta's customers, considered a bellwether in Japan, is seeing an "overall slowdown across the line. They're a bit distraught over that."

    The news was a bit of a shock to the company. "It was a surprise up until literally last week," Allen said.

    The company made no comment on estimates for earnings. First Call's consensus estimate is for a loss of 11 cents a share. Transmeta said it is likely to take a charge for the write-down of excess inventory in the quarter.

    Although Transmeta maintained that it is still winning contracts from competitors, analysts said that might not be enough to make up for the dwindling volume of its shipments.

    Merrill Lynch analyst Joseph Osha lowered his rating on the stock to "neutral" from "long-term buy," citing "weak demand and excess inventory."

    Based on the company's lowered revenue targets, the analyst predicts a loss of 14 cents a share for the quarter, compared with his previous estimate for a loss of 10 cents a share. Osha also dropped his whole-year estimate to a loss of 45 cents a share from a loss of 37 cents a share.

    Montgomery Securities analyst Alex Gauna downgraded the stock to "market performer" from "buy."

    Morgan Stanley's Mark Edlestone reiterated an "outperform" rating on the stock and said he believes "Crusoe processors have the potential to enjoy market-share growth in the notebook PC segment over the next two years." Morgan Stanley Dean Witter and Banc of America Securities were among the underwriters for Transmeta's November initial public offering, which priced at $21.

    Room to grow?
    Despite the downgrades, analysts remained optimistic about Transmeta in the long run. "Demand for small and light form-factor notebooks should continue to grow, and Transmeta has the best microprocessors for the market," said Osha, who kept his long-term rating at "buy."

    Stock price from June 2000 to present.  
    Source: Prophet Finance

    But many analysts questioned the company's ability to keep winning contracts and to make up for shrinking shipments.

    The company's "shortfall reflects ominously on the strength of Transmeta's design wins to date," Gauna wrote.

    The company maintained in its news release Wednesday that it continues to get design contracts over its competitors, and it is only the volume of shipments that is suffering.

    "We have achieved new design wins this quarter with key companies?including Toshiba, Sharp and RLX," Allen said in a statement.

    Analysts, however, raised doubts about the company's ability to keep getting those contracts.

    "We suspect both Intel and AMD, with its new Palomino (chip), have been aggressively pursuing Transmeta customers, though the company is not aware of any design losses," wrote Salomon Smith Barney analyst Jonathan Joseph.

    Staff writer Margaret Kane contributed to this report.