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:

http://www.transmeta.com/corporate/board.html

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:

http://www.investorvillage.com/smbd.asp?mb=329&mn=27418&pt=msg&mid=5553223

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.

America's Bailouts Approaching a Trillion Dollars

Courtesy of Reuters, here's a nice pie chart of the recent bailouts.

Stocks Update, 9/17/2008

Sigh. My open positions are tracking the market's decline. The market has humbled us all.

Open Positions
EWM =-19.88%
EWS = -21.60
EZU = -15.38
GLD = +4.83
GXC = -23.81
IF = -31.02
KOL = -23.87
SWZ = -16.29
YHOO = -5.58

[Average of "Open Positions": losing/negative average 16.96%]

Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from average; insignificant movement)
PFE = -5.5
PNK = -16.7%
PPS = -2.8
VNQ = +2.37 [sold 8/7/08]
WFR = +0.9 (approx; based on partial sales week of 8/4/08 in two separate accounts)
WYE = +2.4%

[Overall Record for 7 day+ trades: Lost an average of 2.82%]

Held less than 7 days:
DUK = (0%, excluded from avg) [8/07/08 - 8/14/08]; GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; GRMN (-6.2%) [Sold 8/5/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), KOL (13.2%) [9/17/08 to 9/19/08]; NVDA (8.0%) [8/12 to 8/13/08]; PFE (1.3%), SCUR (15%); SO (-0.3%) [Sold 8/5/08]; TTWO (4.3%) [partial sales on 8/5/08, 8/7/08, and 8/8/08]; TTWO (2.2%) [9/9/08 to 9/12/08] [Overall Record excludes recent KOL sale]

[Overall Record for ultra short-term 2 to 7 days trades: Gained an avg of 2.36%]

Daytrades:
PFE = +0.5%
GE = +0.5% (Updated on July 14, 2008; bought at 27.15, sold at 27.30)
XLF = +4.3% (Updated on July 15, 2008)

[Overall Record for daytrades: Gained an average of 1.76%]

Compare to S&P 500: losing/negative 16.5%
[from May 30, 2008 (1385.67) to mid-day September 9, 2008 (1156.39)]

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

Capitulation is here...again (Good times to follow)

For anyone who has monies in a 401k, a Roth IRA, or some other retirement account and is under 35 years old, now may be a good to enter the market and use up some of that financial gunpowder.

From Barry Ritholtz: "The criminal enterprise, formerly known as Russia, has decided to halt trading. With its stock market down 57%, Putin & Co. are being even more risk averse than Paulson, Bernanke, et.al. & Co."

You know times are bad when Russia halts trading. But people with a long-term horizon of at least ten to fifteen years may want to add to existing positions. The economy and the stock market go through boom-bust cycles, and you can't enjoy the boom unless you get in on the bust. I've personally seen my retirement funds decline in value by over 10,000 dollars in the last two to three months. I've continued adding to positions, especially in the Asian markets. Barring some cosmic wrath directed at me, I don't need the retirement money now, tomorrow, or even ten years from now.

From Warren Buffett: "We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful."

If this isn't fear in the air I smell, maybe it's eu de depression. Come November, we will have a change, with either candidate bringing fresh ideas to the White House (McCain with less tolerance for pork and corruption, and Obama with, well, Obama). Good times will be here again, because a) we can (or should try harder to) learn from Japan's mistakes bailing out their banks; and b) financial services are still not that vital to an economy, once liquidity is restored.

We had a great economy back when Citigroup, BofA, and WaMa were just small or midsize banks. I still remember Citigroup being "just" 19 dollars during the heyday. Banks were never meant to be growth stocks. When they go back to paying a stable dividend, maintaining good credit profiles, and selling some insurance, the world will be a better place. And if I never have to hear about credit default swaps, I will be a happy man.

Interview with Ultizen's CEO Lan Haiwen

With the EA/Take-Two deal falling through, I had the opportunity to interview Lan Haiwen, CEO of the Chinese game development company, Ultizen:

http://www.ultizen.com/about_leadership.asp

He gives his opinion on what will happen with Take Two and provides a dire assessment of the gaming industry's X-Mas sales targets. While many investors like to say gaming is recession-proof, this X-Mas season may prove them wrong. My interview with Mr. Lan is below.

1. Where is your company headquartered? Please list how many employees you have in each specific country to give readers a better idea of your size and global reach.

Headquartered in Shanghai China. Ultizen has, totally, over 350 employees, 300 in Shanghai China, 50 in Beijing China, and 2 in LA US.

2. Please explain the background behind “Ultizen” as your company’s name.

Ultizen means: Ultimate Zen

3. Does your company have a focus in terms of what kinds of games it makes (i.e.,sports, role playing, action)? If so, why did your company decide to focus on that particular area? What is the name of the new XBOX game your company is making for Microsoft, what kind of game is it, and when is its expected release date?

We focus on casual game development mainly on PC and Mobile phone. We also do game outsourcing work for oversea studios/publishers. We believe the needs of game outsourcing would be huge as the next gen games cost so much money and time on development. We also believe casual game would grow fast as it targets to mass market. The name of our new XBLA title is called Crazy Mouse, it is a family fun game, and will be released in second half of October 08. This is our own IP title, and Microsoft will publish globally.

[My note: see http://games.teamxbox.com/xbox-360/2100/Crazy-Mouse/]

[My note: given what I've heard at Adobe and Yahoo shareholder meetings, Mr. Lan is correct--mobile gaming is projected to be a huge market.]


4. How many total games has Microsoft asked you to make, and how did you manage to get its business?

As I said, it is not [that] Microsoft asked [for a] game, but our own IP title. We do get lots support from Microsoft during the development, as we developed this title at Microsoft incubation center in Chengdu, China. We won the game design contest held by Microsoft, and got the chance to develop at the incubation center. This is the first China developed XBLA title that be published globally.

5. What are your competitive advantages over more established, well-known game companies?

Our competitive advantage is creativity, development process, quality control and low cost.

6. What is your opinion on EA's decision to walk away from Take-Two? Do you believe another company will make an offer for Take-Two? If so, who do you believe is the next most likely suitor?

I think it is a good deal, and Take-Two shall take it. I believe there are other companies will offer to buy Take-Two, [and] I guess those potential buyers would be from big media groups rather than game companies.

7. What developments do you expect to see in the gaming industry over the next six months? Do you believe game makers will reach their X-Mas sales targets? What are the reasons for your belief?

Yes, over the next 6 months, X-Mas would be huge sales season. [But] I believe only 10% will reach their targets, as the economy environment is really bad and people may reduce their shopping budget.

8. In 100 words or less, please tell me anything else you would like to share about your company.

I would like to use much less words: the best game studio in China.

Mr. Lan clearly has enthusiasm for his work. I thank him for the opportunity to interview him over email.

Scott Burns and the Medicare Problem

Scott Burns, formerly with the Dallas Morning News, has an insightful take on an "old" problem. He shows how Medicare will negatively impact not just young children, but 30 year old adults:

http://assetbuilder.com/blogs/scott_burns/archive/2008/09/12/medicare-the-biggest-threat-to-our-retirement-standard-of-living.aspx

Scott Burns, Peter Peterson, David Walker, and Richard Fisher have warned us about the Medicare ticking time-bomb. With apologies to Aldai Stevenson, we need more than just the thinking men to agree that change is necessary. Seniors tend to vote in higher numbers, and it will take a strong, bipartisan effort to fix the broken entitlement system. Someone needs to figure out how to counteract advertisements of grandma not being able to afford her medication, or stories about seniors skipping lunch so they can afford medicine. Such tactics are bound to be used to support the status quo, which is hurting America's younger generations. What can we do when so many Americans spend their working life not saving enough and then end up relying on the government to survive?

This isn't an old-vs.-young issue. The negative savings rate destroys the feasibility of universal healthcare for all Americans, young, middle-aged, and old. Universal healthcare requires more taxation, a surplus, or a weakening of the American dollar, and since we don't have a surplus, I'll give you two guesses as to what the other options are in the absence of a higher savings rate. Meanwhile, here's what the Federal Reserve of San Francisco says about China's savings rate (http://www.frbsf.org/publications/economics/letter/2008/el2008-03.html#5):

China's overall saving rate is now nearly 50%, by far the highest in the world. China's domestic investment rate has also been high, but not as high as saving, resulting in net current account surpluses which rose from 4% of GDP in 2004 to 7% in 2007.

Sadly, America's economy is based on other countries lending us money to spend while America prints more money to sell to the creditor countries, whose citizens save their money. But without Americans spending money, fewer people get to move up the economic ladder, because a nation of savers is terrible for growth and jobs. So the key is for central banks to work together to create timely incentives to spend and to save. Forget about presidents working together--I'd rather see central banks getting chummy first.

Capitulation?

Headline: "Dow Plunges 500 Points on Lehman Bankruptcy, Merrill Sale, AIG Woes"

If I had to venture a guess, I'd say today was the capitulation we've been waiting for. Perennial pessimist Nouriel Roubini said he expected another 20% drop, but to me, his prediction is a good contrarian indicator.

[Note: I also called capitulation on 9/17/08. The next two days, the market went up around 10%.]