A Transition at Transmeta

Officials at Transmeta are expressing sadness,
with a hint of optimism, for having to change their business model.

The Santa Clara, Calif.-based firm that once boasted Linux creator
Linus Torvalds on its payroll is cashing out its chipmaking business to
save itself and is transitioning to a technology and intellectual
property licensing company.

Transmeta CEO Matthew Perry said the company has suspended production
of its 130-nanometer (nm) family of Efficeon and Crusoe processors and
will sell its current inventory. The company will continue to
develop its new chips, including its 90-nm process products to its
“select customers” only.

Perry said Transmeta received a wealth of positive feedback in
support of its technology. After two years of establishing the new
revenue stream, Perry said the time had come to do things differently.

“We want to assure our customers that it is our intent to support
their near- and intermediate-term needs, either directly or through some
form of strategic collaboration,” Perry said during a conference call.

Beyond the designs for its Efficeon and Crusoe chips, Transmeta is
offering licenses for its Microsoft-enhanced AntiVirusNX technology;
both of its battery and transistor power management enhancements LongRun
and LongRun2; and its Code Morphing tools. So far, most computer makers
are interested in saving power. In addition to NEC
and Fujitsu, Transmeta said it has licensed LongRun2 to Sony.

Perry said Transmeta is also engaged in discussions with other
top-tier companies about the its microprocessor designs and
development capabilities, as well as its intellectual property.

The update to Transmeta’s plans to modify its current business model
highlight just how far down the company has slipped in the past
year — a far cry from the rebel days that had rivals Intel and AMD taking note of Transmeta’s
low-power, x86-based architecture.

Transmeta’s cash balance at the beginning of 2005 was $53 million,
nearly 60 percent down from $130 million a year ago. The company’s last
SEC statement shows 12 consecutive months of operating losses, from $28.7
million in December 2003 to $21.9 million in November 2004. The company
also spent a record $13.7 million in R&D last quarter, even though it
only showed $4.3 million in gross profit.

As part of its overall restructuring plan, Transmeta will reorganize
its operations on March 31 and keep only those business divisions it
plans on riding out the storm with. Because of that, Transmeta said it
has notified employees and contractors that it may reduce its staffing
as early as March 31. As part of its effort to retain employees during
this interim period, it has put in place an appropriate
retention program.

“A lot has to transpire here over the next couple of months. In the
event we are unable to close a number of things, we will look to see that
some, if not all, of the current employee resources are not affected by the
March 31 action,” CFO Mark Kent said.

Financing and restructuring mitigated some of the financial bleeding.
During the fourth quarter, Kent said Transmeta paid off a development
contract with IBM, including paying $4 million that it owed IBM in
December and an additional $7 million to defer the rest of its debt of
$5 million to Big Blue until June 30, 2006. Transmeta also raised $16
million with the sale of some common stock in November, Kent said.

One option
being discussed publicly outside of Transmeta is putting the company up for sale.

“I’d bet on Intel or Samsung, with Microsoft only interested if they
fully understood the Linux threat this would represent should it fall
into hostile hands,” Rob Enderle, principal analyst and founder of IT
research firm Enderle Group, said. “VIA could be very interesting but I
don’t see them funded to a level to do this. Fujitsu hasn’t been much of
a player for some time, so I actually would bet more on Samsung who has
been coming up fast, seems willing to take chances like this, and would
likely both see the potential here and have the resources to take
advantage of it.”

Linley Gwennap, founder and chief analyst of semiconductor research
firm Linley Group, doubts a fire sale is in the chips for Transmeta.

“I don’t think it would make sense for Intel or AMD, which have their
own mobile processor architectures, to adopt Transmeta’s, which, after
all, has been unsuccessful in the market,” Gwennap told
internetnews.com. “Microsoft does not want to be in the CPU
business, nor does HP. It is possible that Fujitsu or another Asian IC
house could pick them up, but most of them do not want to butt heads
with Intel in the PC market.”

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