Transmeta IPO: a "blindfolded layup"?
David Menlow, president, IPO Financial
Transmeta designs microprocessors for notebooks and Internet devices that consume less power than competing processors from Intel and Advanced Micro Devices. The stock was sold to pension and mutual funds and will be exchanged in the public market tomorrow under the symbol "TMTA."
Although the company's patent portfolio and design wins with major manufacturers such as Sony have excited investors, Transmeta has recently had to contend with a spate of less than positive news.
Despite the relevation from IBM, Transmeta raised the prospective IPO price of its stock from a range of $11 to $13 to $16 to $18 on Friday.
While it is impossible to predict how the public will react to the stock, tomorrow's trading will likely be intensely scrutinized. The company's eventual fate has been one of the central topics of debate in the semiconductor industry this year.
Some analysts and executives have said the company's technology, combined with its commitments from the likes of Sony and Gateway, could allow it to carve out a profitable niche in the portable market.
One analyst noted that Transmeta's stock, at $19, would trade at a fairly low multiple of the company's current revenue. Eventually, the company's stock could sell for $55.
Others have said Transmeta's prospects look best in the abstract and that the company will have difficulty turning a profit in a competitive market.
The overall performance of Transmeta's chips has also been a hotly debated topic, and one that has been exacerbated by the fact that few Transmeta notebooks have been released. Analysts such as Linley Gwennap of the The Linley Group and Insight 64's Nathan Brookwood speculated that the IBM cancellation could have been related to uninspiring performance.
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.