Thursday, September 18, 2008

Transmeta (TMTA) Shareholder Meeting

I attended Transmeta Corporation's (TMTA) shareholder meeting this morning. The meeting took place at the Santa Clara Hilton at 8:00AM and was attended by approximately twenty people, with around three to six non-employees attending. The food spread included typical hotel seminar fare, such as Starbucks coffee, some fruit, and some pastries.

I arrived about eight minutes late, and TMTA had started its meeting with the informal part and was in the middle of a basic slideshow. The formal part of the meeting lasted a few minutes, and then we moved to the Q&A session. Prior to the Q&A session, TMTA honored one of its retiring Board members, William Tai. More on Mr. Tai after the jump:

Transmeta (TMTA) has around 35 employees and generates much of its revenue from licensing "LongRun and LongRun2 technologies" for controlling leakage and increasing power efficiency in semiconductor devices. The company focuses on power management and transistor leakage control.

One shareholder had several questions and asked questions given to him by other shareholders who could not attend. I will summarize his questions and CEO Lester Crudele's responses as best as I can. The shareholder asked several questions that required forecasting, a legal no-no, causing Mr. Crudele to answer, "We have no comment," to numerous questions.

Q: Given some of the promises of shareholder value, why do you think we're still trading below cash value?
A: I don't understand the motions of the stock market. We have valuable technology.

Q: Do you have any comments on program trading and short sellers?
A: No comment.

Q: When do you believe you will have a market cap of over a billion dollars?
A: No comment. We are still selling licenses, so the company has value.

Q: It feels like their are other infringers, in addition to just Intel [Note: TMTA settled with Intel (INTC) for an initial payment of $150 million with annual payments of $20 million from January 31, 2009 to January 31, 2014.]
A: We will vigorously defend ourselves and plan on defending our patents.

Q: Are you planning to approach more foundries?
A: Yes.

Q: Do you expect a license from AMD?
A: We have a long history with AMD. They invested in us last year.

Q: Do you expect your patents to hold up in continuing litigation?
A: One(?) out of eleven of our patents involved in the Intel litigation are being re-examined.

Note: an astute Seeking Alpha reader pointed out that all the patents are being re-examined:

Q: Why don't you communicate more with shareholders?
A: The licensing business is very lumpy, it takes time [to get an agreement], and it's difficult to know when the agreements close, as they are usually under NDA.

Q: You don't have much analyst coverage.
A: We are a small size [company], and our current revenue situation [does not bring much coverage].

Q: Your business model seems to be a one time cash payment for the license. What about sustaining revenue over a long term period?
A: We usually get an initial licensing fee and then royalties for continuing use of the license.

Q: Will you be buying back shares? What about a dividend?
A: No comment.

It wasn't a tense exchange, but the CEO did look exasperated with the questions that required him to project revenue or financials into the future. The shareholder appeared to be out for blood, but the CEO answered most of his questions politely.

It was my turn to ask a question. As a layperson, I don't always understand a company's technology, and I always ask the CEO to explain what the company does and what their products offer. CEO Lester Crudele looked pleased to get a question he wasn't legally barred from answering. I am going to do my best to summarize his response. Mr. Crudele said that when electrical currents run through circuits, the currents don't always move consistently and often lose some of its power [which can cause heat and overheating within the IC chip]. He said this current leakage benefited from an on/off switch that regulated the flow of the electrical current.

I asked him whether his product was hardware or software. Mr. Crudele initially said hardware, but when I asked him to be more specific, he said his product was the "technology," and assigning products to hardware/software categories was a limited view of technology. I wondered: if a CEO cannot definitively say his product either has software that goes on the chip, or some tangible hardware, like the chip itself, what exactly was he selling? (TMTA no longer makes any chips: its website states, "Transmeta no longer manufactures, offers for sale, or provides engineering support for any of its microprocessor products.") The CEO, realizing I was confused, told me to come talk to him after the meeting. The meeting ended shortly after my questions.

Before I was able to get to the CEO, two other employees seemed eager to fill the gap in my knowledge. I decided to speak with one of them, Daniel Hillman, VP of Engineering, to see if I could get more information. Mr. Hillman did a very good job explaining TMTA's product. He indicated the product isn't hardware per se, but affects the hardware. It can be used on any kind of chip, and works on all chips, including integrated circuit chips. He used an analogy to explain further. He talked about having a fireplace in a house, but without the ability to control how hot it was. If you just throw logs on an open fire, the fire doesn't move predictably and has energy going in different directions at different speeds. You can't control the heat and the spread of the temperature in an unregulated fire, and it's the same way with transistors. With TMTA's product, you have a thermostat dial and can regulate the heat (i.e., the current) in a particular range.

Mr. Hillman's analogy made perfect sense, but I was still confused about the actual product. Mr. Hillman patiently explained the "product is inside the chip." TMTA's technology works on the entire chip--it's a "fundamental thing." It's not a component like a USB or memory--we go "down to the transistor physics level." Returning to the analogy of a fireplace in a house, TMTA doesn't build the house, but can regulate the temperature in the house. Thus, TMTA allows you to "dial back" the heating to prevent overheating or uneven temperatures, while leaving alone the cold parts of the house. TMTA's products are as follows:

1. Sensors. TMTA sells sensors that can tell you how much heat is in the chip, how much consumption is used by the chip, and how fast the heat is spread in the chip.

2. Controller. Mr. Hillman repeated the the on/off switch analogy used by the CEO Lester Crudele. The controller can shut off a chip's heat if necessary. A "controller" has many meanings. In general, anything that can control an electronic function is called a controller. You can control electronic current, voltage, temperature and other activities.

3. Voltage source on a chip. Mr. Hillman did not elaborate, and he may have meant to combine this product in the controller category above. Voltage source is needed by a transistor or any electronic circuit to work. It is like a switch that can turn on or turn off a transistor.

Mr. Hillman indicated that TMTA's products are "one way of addressing power." TMTA deals with the "fundamental activity" of a chip and changes the behavior of transistors. In a great line, he said TMTA makes chips orderly--it takes the "rabblerousers and makes them well-behaved."

I asked whether TMTA basically sold the blueprint for chips. Mr. Hillman did not say my analogy was incorrect. Thus, it appears that TMTA has some patents that certain chip companies use or must use in their chip production process. Through litigation, TMTA can exact licensing fees from various chip companies or companies using its technology.

The CEO's statement that hardware/software was a limited view of technology now made more sense. Rather than reinvent the wheel, some chip companies choose to pay TMTA a licensing fee so they can run their business, and that's where TMTA appears to make its money. TMTA's value lies in sustaining the viability of its patents, having an experienced litigation team, and being able to successfully negotiate with chip companies. TMTA is not a growth story. It's own 10K states, "Our customer base is high concentrated. For example, revenue from two customers in the aggregate accounted for 89% of total revenue during fiscal 2007."

As new technology enters the market, other companies may not need to license TMTA's patents. New technology may allow chip companies to regulate heat and power management in ways different enough to justify spending the money on litigation to fight TMTA in patent litigation. For now, and perhaps over the next few years, TMTA will continue receiving revenue from its prior work. If Intel settled with TMTA, and Nvidia (NVDA) bought a license, TMTA's patents are viable. But in technology, Darwin's Law is harsh and comes with great speed. TMTA looks like a company trying to conserve cash to survive. If you're looking for a growth story, this isn't it; however, as long as its patent portfolio remains viable, TMTA may be a potential takeover target or value play at the right price.

More analysis from a Ph.D. in electrical engineering: "It is not clear from your email exactly what kind of technology they [TMTA] are referring to; however, it appears that the technology is a combination of voltage source sensing and fabrication process control. This means that when we make transistors to build an electronic circuit, they can add another layer in the chemical process that can control electric current and hence the temperature of the transistors. Transistors, which are basic components of any electronic circuit, are made of staggered chemical layers on a piece of silicon. Now they can alter this fabrication process to control the current/temperature of the chip."

Disclaimer: I own fewer than 25 shares of TMTA.

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