Dow Jones article
TALES OF THE TAPE: Spring Sale: 90% Off Transmeta's IPO
By Donna Fuscaldo
05/03/2002
Dow Jones News Service
(Copyright (c) 2002, Dow Jones & Company, Inc.)
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- When Transmeta Inc. (TMTA) went public in November
of 2000, investors couldn't get enough of the stock.On the day of its
initial public offering, shares of the chip maker more than doubled from
its offering price of $21 and many investors were shut out of the
oversubscribed offering.
A year and a half later, however, Transmeta's stock is trading at a
paltry $2.25, a 90% discount to its Nov. 7 debut. Many of the
institutional players who wanted in on one of the hottest technology IPOs
in recent years have gone away. But despite the chip maker's woes, some
analysts and investors see a bright future for Transmeta.
With $216.3 million in cash, a new chief executive and additional
market opportunities on the horizon, these supporters say Transmeta is
doing all the right things to turn the struggling company around.
Transmeta, Santa Clara, Calif., makes a low-power microprocessor called
Crusoe, found in laptops made by the likes of Sony Corp. (SNE), Toshiba
Corp., Hitachi LTD. (HIT), and NEC Corp. (NIPNY).
When the company went public, it hoped that it would become a dominant
force in providing chips for laptop computers. The thinking went that
its unique technology, which significantly enhances the battery life of
mobile computers by using software to eliminate the amount of
transistors on a chip, would enable it to beat out Intel Corp. (INTC),
which had yet to release a comparable chip, in the laptop computer
market. The company was even billed as an "Intel Killer."
But as the story goes for many start ups trying to take on mighty
Intel, Transmeta suffered from a series of missteps, including a big
execution snafu that cut into revenue and an inability to persuade U.S.
notebook makers to use its chip. All of which allowed Intel to catch up.
"The thing about competing with Intel is, you can catch them short but
you only get one chance," said Joseph Osha, an analyst at Merrill
Lynch. Not only did Transmeta miss a product cycle, which was very
costly, it gave Intel another six to nine months to get its act
together, he said.
Nevertheless, Brian Alger, an analyst at Pacific Growth Equities, has
maintained a buy rating on shares of Transmeta since January. He said
fears that Transmeta wouldn't survive its execution mishap and would
loose all its customers were unfounded.
Transmeta "survived the death knell," Alger said, and started shipping
in volume in February. Not only has the company met Wall Street's
estimates for the first quarter, it raised its revenue target for the
second quarter, and has held on to all the customers it had last year,
he said.
In its first quarter Transmeta reported revenue of $4.1 million, down
78% from the $18.6 million it posted a year ago. For the second quarter
the chip-maker is targeting a 55% to 65% sequential increase in sales.
According to Alger, on top of Transmeta's progress in turning itself
around from a financial and execution perspective, the company will
also have a new market opportunity with the launch of the Tablet PC, a
product that Microsoft Corp. (MSFT) has been focusing on heavily.
"Whether or not (the Tablet PC) is successful, it will still see a lot
of marketing dollars coming from Microsoft," said the analyst. "The
Tablet PC has power requirements that right now only Transmeta can
meet."
Still, Merrill's Osha noted that Intel's mobile processor, code-named
Banias and slated to be rolled out in the first half of next year, will
address the power requirements common to notebooks and other handheld
devices.
The Tablet PC, which Bill Gates has been pounding the table on for
about two years, is designed to function like a portable writing tablet
that runs on the Windows XP operating system. In its prototype,
Microsoft used a Transmeta chip and according to Alger, Compaq Computer
Corp. (CPQ) is rumored to be following suit.
Compaq's Tablet PC is being manufactured in Korea and right now it's
believed to have a Transmeta Crusoe processor in it, said Alger. A
spokesman at Compaq said the company hasn't made any decisions on which
chip it will use and Transmeta declined to comment.
While the Tablet PC may indeed be a new revenue stream for Transmeta,
how successful it will be is up for debate.
"The tablet PC has a lot of potential and could over time gain a big
foothold in mobile computing," said Tim Bajarin, president of Creative
Strategies consulting firm. Still, "we need to understand more about
what Microsoft does with the software and we need a lot of hardware
guys to support it."
Hal Berry, an analyst at Graham Partners, a New York hedge fund that
owns roughly 140,000 Transmeta shares, isn't betting on the Tablet PC
propelling Transmeta to new riches. "To me, it doesn't seem like a real
product," he said.
What Berry said Transmeta needs to do to see its stock price improve is
announce that U.S. computer makers are using the Crusoe chip in their
laptops.
"If Transmeta gets one of the large OEM's like Gateway or Dell that
would double the stock," said Berry.
That, however, may be a tough feat for Transmeta. In order for it to
win a large U.S. vendor, Transmeta will have to convince the market it
can really execute, said Rob Enderle, an analyst at market-research
firm Giga Information Group. "No one wants to take on Intel with a
partner that can't execute," he said.
Whether a new design win in the U.S. laptop market is in the cards for
Transmeta is anyone's guess, since the company is pretty mum on that
topic. But what Transmeta is vocal about are its future prospects.
In an interview with Dow Jones, Matthew Perry, Transmeta's new
president and chief executive, who was named to the spot on April 10,
said that there will be additional market opportunities for Transmeta
as new Internet devices are launched that require low power
consumption. Over time, he believes low power processors will become a
requirement.
But will Transmeta be able to add a U.S. laptop maker to its client
roster?
David Ditzel, Transmeta's co-founder and chief technology officer, said
the company "clearly has potential."
Laptops in Japan are moving on to store shelves in the U.S. and will
give the Crusoe chip name recognition, Ditzel said. In Japan, Crusoe is
a household word, he added.
According to Ditzel, signing on U.S. vendors had always been a long-
term strategy, not one that would happen overnight. U.S. vendors tend
to take a wait-and-see approach to ensure the technology really works,
he said.
But with every major Japanese notebook manufacturer using Crusoe, U.S.
companies "can see it works well," he said.
-By Donna Fuscaldo; Dow Jones Newswires;
donna.fuscaldo@dowjones.com
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