SANTA CLARA, Calif. - News of a glitch with its X86-compatible Crusoe processor couldn't have come at a worse time for fledgling startup Transmeta Corp., which is seeking to gain credibility in an Intel-dominated world. Transmeta's stock
tumbled 18% on Wednesday (Nov. 29) and another 10% on Thursday.
The glitch, which forced NEC Corp. to recall a number of notebook computers based on the Crusoe processor, was due to a failure that might occur when a user reinstalls an operating system. NEC stressed that only one batch of products was affected - 284 of a shipment of about 2,800.
"We are replacing all affected notebooks immediately from today, but we are not otherwise withdrawing notebook products that use the Transmeta chip," an NEC spokesman said in a statement Thursday. "The issue with the chip was limited to one particular lot, and that is all." The statement went on to say that the issue will not affect NEC's commitment to the processor for other products.
The stock's downslide comes after a successful initial public offering that saw gains of more than 115 percent in its first day of trading. Less than a month later, Transmeta's stock hit a high of 50 7/8. At the close of market Thursday (Nov. 30), the stock had fallen to 21 1/4.
In a effort at damage control, Transmeta conceded in a statement that the problem may not be limited to NEC notebooks. "Any remaining inventory of this material at NEC or other customers has been returned to Transmeta. Transmeta is currently shipping Crusoe microprocessors to its customers to replenish their
production lines. The potential issue is contained to a limited number of Crusoe microprocessors and, due to the rarity of this event, is not expected to impact end consumers," the statement read.
The impact may undoubtedly be worse for the super-secretive startup, which for years kept the Crusoe under the tightest of wraps.
"This is certainly an embarrassment for Transmeta," said Linley Gwennap, president of market research firm The Linley Group of Mountain View, Calif. "Transmeta's saying that this is a fluke, but if something like this happens again, that would raise a big red flag and customers might reconsider."
Gwennap said that most likely, the glitch is a manufacturing issue and not a design issue. "If only one batch of chips is affected, it sounds like a manufacturing problem."
But other analysts weren't so convinced. "It may be a manufacturing problem and it may be a design problem," said analyst Nathan Brookwood, president of Insight 64 of Saratoga, Calif. "They may change the design now, or they may change the testing to screen for it. My surmise is that there are probably some circuitry on chip pushing the edge in terms of timing."
Brookwood said that trying to reinstall an operating system is a good "acid test" for new chips, adding that Intel had similar problems with the early Celeron design. "Installing an OS is one of the more intense things you do. You exercise code paths that don't get exercise anywhere else."
Brookwood also believes that this gaffe won't force potential customers to hesitate. "Transmeta needs to have a complete understanding of what the problem is, they need to demonstrate that this is not fundamental to the design. And I don't think this necessarily disqualifies them from other designs. I'd be surprised if they could not explain this."
Reports coming from Reuters indicating that Sony had a similar problem with Crusoe and pulled 13,000 Crusoe-based Vaio notebooks off the market were erroneous, according to that company. "We have received no reports from customers experiencing any difficulties relating to the issue here in the U.S.," a spokesman said.
Gateway, which recently unveiled an Internet appliance dubbed Web Pad in conjunction with Transmeta, also said it was experiencing no problems. The Web Pad was set to go on sale Friday (Dec. 1). "I don't see any correlation at all," said Greg Lund, Gateway's manager of Consumer Initiatives. "We continue to look at the best value for our customers, and Transmeta is certainly in contention for our business in the future."
The Crusoe slip comes fresh on the heels of IBM's 11th hour decision not to utilize the processor in its ultralight ThinkPad systems. While IBM is the sole manufacturing source of the Crusoe chip, the company said it would continue using Intel chips.
Analysts believe that this current slip-up may not be Transmeta's biggest problem. "I think the bigger problem they have is to demonstrate that their chip delivers the kind of power savings and performance the market demands," Brookwood said.