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Kodak's Big Picture Focusing on Image Change
via NewsEdge Corporation



Jan. 29--NEW YORK -- Time was when Eastman Kodak Co. meant photography, and everyone dutifully bought its yellow boxes of film and had them developed in a lab owned by the Rochester, N.Y.,company.

In those days, prior to the digital age, Kodak's only serious competitor was Fuji Photo Film Co. Kodak was a corporate icon, part of the blue-chip Dow Jones industrial average.

But Kodak was bumped from the Dow in 2004 after more than 70 years, and it faces many more competitors, both in-store and online, than ever before. To transform its products, services and corporate culture from a photography-based business into a digital-imaging company, Kodak has cut thousands of employees and written off millions of dollars in assets.

But Alexis Gerard, president of industry consultancy Future Image, said Kodak's challenge isn't just to come up with new and better products; it's about positioning itself as the be-all and end-all in imaging.

"The real story for Kodak isn't the transition from chemical to digital," Gerard said. "It's the transition from consumable to services."

That is, Kodak must figure out not just how to convince consumers to buy its cameras and home printers but also how to become known as the most convenient and affordable way to process those images. That means home and store printing as well as sending images over the Internet and cell phones.

For Kodak investors, 2005 was difficult: Shares fell 27 percent amid increasing concern about the company's ability to make the transformation.

In the third quarter, for instance, consumer digital sales increased 22 percent, to $708 million, as sales of traditional film and single-use cameras dropped 28 percent, to $1.29 billion. But investors were expecting better gains for Kodak's digital cameras, printers and assorted services.

Equally significant, said Jay Vleeschhouwer, a Merrill Lynch analyst, investors have been surprised at how quickly Kodak's traditional photography business has shrunk.

"The digital number is rising, but not fast enough to offset the decline in traditional film," Vleeschhouwer said.

As its traditional film business waned, Kodak spent $2.7 billion over the past year to acquire a string of companies for its graphics communications unit, which accounted for 24 percent of its revenue at the end of the third quarter. Traditional and digital photography accounted for 56 percent, down from 70 percent at the end of 2004, while Kodak's health group made up the remainder.

Restructuring has eliminated 15,500 positions worldwide, with another 10,000 to disappear over the next 18 months.

When investors listen to Kodak Chairman and Chief Executive Antonio Perez during the company's fourth-quarter earnings conference call on Monday, they'll be eager to know whether the company has narrowed the gap between its digital gains and traditional business losses. They'll also be looking for guidance about Kodak's free-cash-flow projection for 2006.

For the fourth quarter, the Wall Street consensus as reported by Thomson Financial is for Kodak to earn a pro forma 39 cents a share, down 50 percent from the year-ago period. Vleeschhouwer expects 36 cents a share.

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