Chips Are Down at Transmeta

The chipmaking days at Transmeta may be
coming to an end.

Facing increased pressure from Intel and AMD
, Transmeta said it must evaluate its current business model of designing, developing and selling
x86-compatible microprocessor products.

The company said it is also in active discussions to license the
microprocessor designs of its Crusoe and Efficeon families.

Company president and CEO Matthew Perry said the focus in 2005 should shift to the company’s intellectual property licensing business and building up its portfolio of advanced technologies like its LongRun2 power management technology. Transmeta began licensing LongRun2 to Fujitsu and NEC Electronics last year.

“By modifying our business model to focus more on our licensing
opportunities, leveraging our substantial IP portfolio and our R&D
capabilities, we would expect to reduce our cash needs substantially and to improve our results for our shareholders,” Perry said in a statement.

“We have historically reported negative cash flows from operations because the gross profit, if any, generated from our product and licensing revenues has not been sufficient to cover our operational cash requirements,” Transmeta said in its third quarter report with the Securities and Exchange Commission, filed on Nov. 8th.

Transmeta could certainly use a financial shot in the arm.
Its Net loss was $28.6 million and $78.7 million for the three and nine months ended September 30, 2004, respectively, compared to $23.7 million and $65.7 million for the corresponding periods last year, the company said in its Nov. 8th filing with the SEC. “Historically we have incurred significant losses, and as of September 30, 2004, we had an accumulated deficit of $621.2 million.”

To help with the bleeding, Transmeta is getting evaluation help from Perseus Group LLC, a San Francisco-based investment banking firm, and other advisors. The company said its Board of Directors will hold a conference call on January 21 to make some related announcements and discuss the auditor’s findings.

Although Transmeta got its start targeting low-power mobile
applications, it tried for the better part of 2004 to broaden its scope to appeal to OEMs looking for more processor efficiency (i.e., a better balance of low power consumption, high performance, low cost, and small size.) The Transmeta Efficeon processor, in particular, is aimed at the low-end blade and high-end workstation market, as well as at mobile, wireless, and embedded devices.

Gartner analyst John Enck was skeptical about Transmeta evolving into a serious challenger in the server x86 chip market. He noted that Efficeon is available only as a single processor option. Once you move
up to two processors, you have to go with AMD or Intel.

“I don’t see Transmeta being used in many mainstream server
products,” Enck said. “Its primary attraction was in lower-power
consumption, so when Intel and AMD came out with lower-voltage
processors, Transmeta was largely marginalized, even in the low-power
blade space.”

The biggest impact may be felt over at HP , which is
using Efficeon chips as an integral part of its Consolidated Client
Infrastructure architecture, where it uses blade racks to virtualize
desktop hardware. Orion Multisystems, which uses Transmeta chips for its
top-of-the-line 96-node servers is also expected to feel the pinch.

Drew Robb of contributed to this report.

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