After long overhaul, Kodak pursues digital foothold

The boom in digital photography triggered a series of aftershocks at Eastman Kodak Co. as one after another of its aged factories was dynamited.

Since 2004, the world's biggest film manufacturer has eliminated 27,000-plus jobs, cast off major operations and invested billions to gain a firm foothold in the highly competitive arena of electronic imaging. It now offers an alluring patchwork to help people harness their photo collections: a 70-million-member online service, 80,000 retail kiosks and an array of digital cameras, printers and other devices.

The most perilous turnaround in Kodak's 127-year history is officially over, and fourth-quarter results due Wednesday will spell out the final four-year toll — upward of $3.4 billion.

But questions about the photography pioneer's prospects are intensifying: Will it adapt and flourish, propelled by a rich portfolio of patents? Is it destined for a breakup? Might it even join forces a few years from now with Xerox Corp., its historic cross-town rival?

"Their strategy makes sense, they're doing the right things ... but the competitive reality they face is extremely daunting and will only grow more challenging over time," said Citigroup analyst Matthew Troy.

Chief Executive Antonio Perez, who ran Hewlett-Packard Co.'s digital printing operations before succeeding Dan Carp at Kodak's helm in June 2005, "is doing an excellent job," Troy said. "It's just that, with what he has, I don't know if anyone can do that job."

Ten of 11 key analysts rate Kodak neutral or advise selling its stock. The shares, which topped $94 in 1997, skidded to a 30-year low when they closed at $18.04 on Jan. 15. Kodak's payroll, which peaked at 145,300 in 1988, has shriveled to around 30,000, a level not skimmed since the Great Depression.

"Supposedly the restructuring is done. Now show us in 2008!" implored George Conboy, president of Brighton Securities, a money-management firm in suburban Rochester. "What they need to convey is the image of a transformed company, and they are far from having done that."

Despite a 30% slide in U.S. sales of consumer film in recent years, Kodak can still rely on its longtime cash cow — and especially its motion-picture film unit — to ease its bumpy ride.

While digital businesses now account for more than 60% of Kodak's revenue and are growing rapidly, they still net only modest profits.

Ulysses Yannas, a broker with Buckman, Buckman & Reid, thinks Kodak has the technology, management, distribution and iconic brand name to support success.

"They'll never get the margins they used to get out of film, but the sales gains they can get out of digital, especially in commercial printing, are unbelievable," he said.

There were inklings of vitality in 2007 when Kodak posted profits in back-to-back quarters for the first time in three years. In July through September, Kodak earned $82 million from digital units as sales jumped 12% to $1.59 billion. In contrast, traditional, film-based sales sank 16% to $986 million.

As high-profit film fades, Kodak's survival will hinge on how well it prevails against entrenched, digital-consumer-savvy competitors such as Sony Corp., Canon Inc. and Hewlett-Packard.

"You're fighting against much larger players with a more singular focus, better balance sheets and bigger scale," Troy said.

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