Transforming Transmeta

By John G. Spooner  |  Posted 2005-06-21

Transforming Transmeta

Transmeta Corp., which once captivated the PC industry with its Crusoe processor for notebooks, is repositioning itself as a journeyman technology provider for low-power chips, in an effort to stem its financial losses.

Although the Santa Clara, Calif., company is still selling one Efficeon processor—Efficeon succeeded Crusoe—for notebooks and thin clients, it is remaking itself in the image of companies such as ARM Ltd. and Rambus Inc. by endeavoring to license its chip technologies. It is offering, for example, LongRun2, its chip power management technology, as well as design assistance to clients who wish to add it to their chips.

The strategy, which Transmeta embarked on in March, is designed to diversify its revenue sources and add numerous partnerships. The company wants to use software licensing, which includes royalties for product shipments, as well as engineering services fees to augment its chip sales. Ideally, it wants to license software and other technology to a company, participate in the design of a chip or system, and then gain royalties for each product that contains its technology.

For more on Transmetas shift from processors to licensing, click here.

"What were really striving to do is completely transform the company," Art Swift, Transmetas CEO, said in an interview with Thus, "what were trying to do is build upon our legacy of innovation … and marry that with great financial performance. We have a vast portfolio of technology and intellectual property that were bringing to market in the best ways possible."

The new strategy might be seen by some as only a last gasp for Transmeta, after the company lost hundreds of millions of dollars in an attempt to challenge Intel Corp. and Advanced Micro Devices Inc. in the notebook market. Transmetas chips use an inventive hardware-software approach that pairs low power and good performance, analysts say. But manufacturing delays hampered its ability to compete, and it rarely shipped more than 100,000 processors in a quarter, said Dean McCarron, an analyst with Mercury Research Inc., in Cave Creek, Ariz.

But Swift said Transmeta has already been making progress. The company saw somewhat higher revenue and a smaller loss during the first quarter. It has inked LongRun2 licensing deals with Sony Corp., NEC Corp. and Fujitsu Ltd.

Microsoft Corp. has tapped Transmeta for a project as well, the companies announced in May.

Transmetas first-quarter bump came mainly from higher sales of processors, not necessarily licensing fees and design services, the company said in a 10Q quarterly filing with the U.S. Securities and Exchange Commission. Transmetas revenue increased $1.7 million, year over year, to $6.9 million for the quarter. Although it reported a $2.1 million smaller quarterly loss, the company was still $21.1 million in the red for the period.

It did take in $14.5 million for licensing LongRun2 during the first quarter. However, it counted the funds as deferred revenue, because it had not yet come through with all the required deliverables, the filing said.

In total, Transmeta has lost $670 million since its inception in 1995, the filing revealed. Still, the company believes it has resources enough to fund its operations, planned capital, and research and development expenditures for the next 12 months, the May 25 document said.

Given Transmetas track record to date, analysts are still somewhat skeptical.

Selling chip technologies can be lucrative, and Transmeta has focused on two of the hottest areas in chip design of late, including low-power and virtualization technology, thanks to its Code Morphing Software, the software portion of its chips, said Kevin Krewell, editor in chief of the Microprocessor Report, in San Jose, Calif.

That means, if Transmeta is able to ink enough deals, its new strategy could prove successful, he said.

Transmetas Sony deal represents an ideal. The consumer electronics giant licensed LongRun2 in January and later hired the services of 100 Transmeta engineers to help it with an effort to create versions of the Cell chip, which can fit into mobile electronic devices. All told, Transmeta now has about 200 employees.

Click here to read more about Sony licensing Transmetas LongRun2.

Transmeta said in its 10Q that the agreement, which is scheduled to last two years, will boost its financials starting with the current quarter.

Next Page: Transmeta to help Microsoft with "proprietary project."

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Microsoft, meanwhile, is using Transmetas engineering services to help it with a "proprietary project," Swift said.

"It involves products as opposed to a pure licensing play," Swift said. Its "smaller than Sony, but its indicative that giants of the industry are looking to Transmeta for our expertise."

For its part, NEC has said it wants to use LongRun2 in everything from cellular phones to servers, Swift said.

Transmeta is also moving ahead with a reduced version of its chip business.

Its selling its Crusoe line and an earlier version of its Efficeon chip, built using a 130-nanometer manufacturing process, to Technology Ltd. of Hong Kong., which SEC filings say agreed to pay $15 million up front for the chips and provide Transmeta with ongoing royalties, will use the chips to create computers for the Chinese computer market, Swift said. The transaction is expected to close in the fourth quarter.

Transmeta will continue on with its 90-nanometer Efficeon line. Although it will make improvements more slowly due to its services commitments, it has at least one new client for Efficeon.

Fujitsu Computer Systems Corp., Fujitsu Ltd.s Sunnyvale, Calif.-based computer arm for the United States, is about to update its LifeBook P1000 with an Efficeon processor. Right now the machine comes with an 800MHz Crusoe TM58000 chip.

Ultimately, however, Transmeta has shifted from selling chips to selling itself.

"The service component is getting our power management technology into as many applications as possible," Swift said. "At the end of the day, our interest is in seeing our LongRun2 technology in chips that are going to sell in the millions of units per year."

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