LONDON Microprocessor startup Transmeta Inc. (Santa Clara, Calif.) has quietly changed its business plan. The company has bought back its two main technology-licensing agreements from IBM Corp. and Toshiba Corp., and now plans to market products on its own as a fabless chip supplier.
The changed stance is catalogued in Transmeta's registration statement for an initial public offering filed with the U.S. Securities and Exchange Commission. Transmeta has bought back from IBM and Toshiba marketing and manufacturing rights to its line of Crusoe X86-compatible processors, which are intended to compete with offerings from Intel Corp. and Advanced Micro Devices Inc. IBM will remain as sole foundry for Transmeta, which must now establish a presence in the market without partners against well-heeled rivals, and with debt incurred by the buyout of its earlier deals.
"Transmeta simply did one thing," said Dav e Ditzel, chief executive officer of Transmeta: "Changed its mind and undid it [the deals]."
Under the technology license agreements it had reached with IBM in 1997 and with Toshiba in 1998, Transmeta gave those companies the right to make and market X86-compatible products based on its technology. Revenue from these deals constituted "substantially all" of Transmeta's revenue in 1997, 1998 and 1999, the company said.
By amending its agreement with IBM in November 1999 and with Toshiba in February 2000, Transmeta is now dependent solely on its own product sales which have only just begun, and not yet in volume through OEMs and distributors.
IBM and Toshiba can still make and market Transmeta products, but they cannot be used to underpin an X86-compatible processor.
Analysts said the move will benefit Transmeta in the long-run, but question its short-term prospects on the technology-heavy NASDAQ exchange.
Transmeta has released no details on the number of shares it will off er or on their initial value, although reports have speculated that the company is seeking to raise around $200 million. These proceeds will be used for working capital and other general corporate purposes.
For the six months ended June 30, 2000, Transmeta reported total revenues of $348,000, with a pre-tax loss of $43.4 million. The company has cash of $112.4 million.
While Transmeta boasts technology guru shareholders such as Microsoft cofounder Paul Allen and Linux creator Linus Torvalds, analysts see the offer as an above-average risk.
Transmeta's silicon is touted as delivering high X86 performance at low power by casting away the baggage of the traditional Intel-style processors. But its competitors are two massively-resourced chip giants Intel and AMD. Its tall order looks greater in light of the fact that, as of the beginning of the year, Transmeta itself had not shipped a single product.
The company has never made a profit. Losses were $10.1 million in 1998 and $41.1 million i n 1999, before reaching $43.4 million for the first half of 2000. Transmeta also has $120 million of long-term debt.
On top of all that, Transmeta has dumped its two main commercial agreements and recast its business plan. The company has bought back the licenses held by IBM and Toshiba that allowed them to market Transmeta's Crusoe family of X86-compatible chips. Transmeta had received license fees, access to engineering and test services, mask sets and other services under those deals.
Now Transmeta has decided to market the silicon itself and use IBM as its foundry. It has struck its first distribution deal and is expanding its OEM sales force.
Buying back the licenses has been expensive. Transmeta agreed to pay IBM $33 million cash over four years plus 600 000 shares. Another 600 000 shares went to Toshiba in February, although no cash was involved.
The changes present Transmeta with the challenge of quickly getting hitherto unseen volumes of its silicon into the marketplace.
Malcolm Penn, chief analyst at Future Horizons (Sevenoaks, England), foresees some serious risks for the company. "They are coming from nowhere," he said. "Revenues are paltry, and getting fab capacity isn't going to be easy."
Transmeta's SEC filing is blunt on the capacity issue. "IBM could refuse to continue to fabricate all, or some, of the wafers we require," the filing states. "If IBM were to stop manufacturing for us, we would likely be unable to replace the lost capacity on a timely basis."
Securing steady supplies will be vital to Transmeta as its immediate goal becomes riding out an aggressive initial response from Intel and AMD. "Even with IBM as a manufacturing partner, it's a pretty closed market [dominated by] powerful people with a vested interest in keeping it that way," Penn said. Transmeta faces the danger of being "condemned to the dregs of the market," he said.
"It looks like they are going to go head-to-head with AMD and Intel they are going to need a ton of money," Penn said. "The market is held by AMD and Intel. [They] could kill them. And $120 million of debt is a hell of a millstone."
Long-term, there are potential benefits to Transmeta's strategy, said Martin Reynolds, an analyst at Dataquest Inc. (San Jose, Calif.). "IPOs are all about [gambles] and Transmeta is going into a sufficiently valuable market, that success could be richly rewarded," he said.
"Getting the IPO out before the company has significant revenues allows investors to get a risk discount and gives Transmeta earlier funding," Reynolds said. "But I'll postulate the discount is small given the general enthusiasm for IPOs."
Ian Cameron is business editor of Electronics Times, EE Times' sister newspaper in the United Kingdom.