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Interview

Kodak President & COO Phil Faraci Clarifies Kodak Position

Recent news stories about Kodak have implied that the company’s digital transition is not going as planned, even suggesting an investigation into filing bankruptcy. While waiting for Kodak to announce quarterly earnings on November 3rd, WhatTheyThink spoke with President & COO Phil Faraci to gain his perspective these issues.

By Cary Sherburne
Published: October 12, 2011

Following a flurry of news activity relative to Kodak’s financial state, WhatTheyThink spoke directly with Faraci, President & COO, to gain his perspective on the company’s current situation, strategies and more.

Please note: Because Kodak has scheduled an earnings release for November 3rd, the company is currently in a “quiet period,” and there were questions that could not be answered in detail for that reason.

WTT: Phil, perhaps you could start by giving us high level view of the state of the digital transition Kodak has been undergoing for several years now.

PF: Certainly. We are very much committed to completing the transition to a profitable, growing digital company. Our digital growth initiatives have demonstrated organic growth in the 20% range over the last couple of quarters, and we are confident we can continue to do that. Those businesses are critical to us, although they only represent about 10% of the company. We see tremendous traction in inkjet in the marketplace, as one example

WTT: So the rumors of an impending bankruptcy filing are false?

PF: Yes. In fact, in the last week, news coverage has become more balanced. From an operations perspective, we are focused on continuing to drive growth in our growth areas, and we are very committed to our customer and supplier commitments. Kodak has no interest in filing for bankruptcy. [CEO} Antonio [Perez} has made that very clear. In fact, in a recent employee town meeting, he said, “There is nothing that is wrong with this company that cannot be overcome with what is right with this company.”

WTT: This speculation seemed initially to be driven by the fact that you have retained Jones Day, a well-known law firm with a specialty in bankruptcy. What is your relationship with them?

PF: We did hire Jones Day, and we have been extensively utilizing them since 2003 in areas related to litigation and intellectual property (IP). We have been in litigation on the IP side for a while, and we have made it public that we are looking at potential monetization of our Digital Imaging IP portfolio, which represents about 10% of our IP portfolio.

Editor’s Note: Jones Day is a large law firm with more than 2,500 lawyers on five continents and a wide variety of practice areas, one of which is Business Restructuring & Reorganization; another is Intellectual Property.

WTT: That brings up another area in which Kodak has been criticized from some quarters. What’s the story with IP monetization?

PF: We see a very attractive and aggressive set of companies trying to acquire IP. It is a hot space at this point, and our IP portfolio is strong. We are by no means liquidating it; we are looking at selling 10% of our portfolio, largely the digital imaging and capture portfolio, and we expect it will be a substantive potential transaction. I can’t speculate on what kind of transaction. That depends on the other parties, and we don’t want to negotiate against ourselves.

WTT: When you say digital imaging and capture, is that the scanning business?

PF: No. It is our camera-type IP portfolio. We have a portfolio which is used for capturing, transferring, uploading, moving and repurposing images. This technology is used in sharing images and in our Gallery. It is related to our digital camera product line. We have no interest in selling IP related to inkjet printing, electrophotographic printing and scanning. These are areas where we basically have solid investments, and they are growing businesses. For IP that we do sell, we are retaining licenses so it doesn’t preclude us from practicing in those domains. We have been licensing IP portfolios for several years now. We have been guiding the revenue gain from those actions at $250 to $350 million per year, but in reality, it has been closer to $400 million over the past several years.

WTT: Kodak still has a film business. What’s going on there, and what is the balance between analog and digital business today?

PF: Film is declining at a fairly rapid rate, and that is true across all of the different film businesses. We have some pockets where we have started to sell some of that processing capacity to the outside world, so there are some growth areas inside of it, but the general direction has been on the order of a 25% year-over-year decline rate, although this year we have seen a more modest decline, about 14% through the first half. In terms of analog versus digital, in 2008, we had a 70/30 split. Today, we are a 75% to 80% digital company. Our gross profit driver is digital.

WTT: Let’s take a look at some of those businesses, starting with NexPress. What can you tell us about the health of that business?

PF: NexPress has been a great business for us. We were in heavy investment mode a few years ago, and now it is a solid part of our product line. I believe we have done a phenomenal job of repositioning our value proposition around that product. The photo solution that we introduced this past year is going extremely well, and we have the best image quality in the industry. A couple years ago, we were a good workhorse product, but we didn’t have some of the tuning complete in the product that made it best in class. Today it is winning benchmarks for quality and has capabilities no one can match, such as dimensional printing and red fluorescing inks. These differentiators are very important as we go forward with entry level production in digital printing. When you combine dimensional printing with our ability to print metallic looking colors, it is a real win. For example, for a specialty piece like a book or magazine, you can create an embossed look like gold leaf, borders, etc. The speed of the machine works nicely with PROSPER production inkjet; you do covers on NexPress and book blocks on the PROSPER. We can also now do larger media sizes, including such things as covers for coffee table books and posters, another new functionality. The SX series is winning a great deal of recognition, and it is best in class.

WTT: How about PROSPER? I understand the press is in beta, and has taken a little longer than you would have liked to become commercially available.

PF: There are PROSPER Presses in all regions today producing work for retail sale. We already have installations on four continents and have recently installed units at Fenske Media in the U.S. and Clays in the U.K. Not a lot of people buy a press that can print fully variable digital data at several hundred feet minute. But that will also change. I believe as you go forward, that commercial printers, whether they are in publishing, packaging or other types of printing applications, will turn to the flexibility, variability and freedom digital provides as compared to offset, and that will continue to drive a higher percentage of firms that might purchase one or more of these presses. Keep in mind that of the trillions of pages printed, a small fraction are printed digitally. That will get to a different balance point over time. You can make a simple assumption that the number of pages printed digitally will go from 1.5 to 2 percentage points to 4 to 5 per points over time, and that will amount to a good deal of growth for us. On the digital side, today we literally measure the pages we print in the billions of pages per month.

WTT: When do you expect to begin commercial manufacturing of PROSPER presses?

PF: We are already in the commercial manufacturing phase and are applying the learnings from each installation. We have a whole list of customers from whom we have either letters of intent or orders for some number. We are starting to look at lead times, and some of that will be pushed into 2012. At drupa, we will have communications around timing and availability. The sales cycle for these presses is typically 12 months or so.

WTT: What about your CTP-oriented businesses, both plates and plate setters. Do you consider that part of the digital mix?

PF: We consider those businesses as part of digital. Everything is pretty much done with CTP. Your point is a good point, though. It still results in materials being printed on traditional presses. We expect that process to generate the majority of printing for the foreseeable future. It will take a long time for digital print pages to reach a mid-double-digit percentage of total pages, certainly not in my lifetime.

Cary Sherburne is a well-known author, journalist and marketing consultant whose practice is focused on marketing communications strategies for the printing and publishing industries.

Cary Sherburne is available for speaking engagements and consulting projects. To get more information contact us.

Please offer your feedback to Cary. She can be reached at cary@whattheythink.com.

 

Discussion

By ed lopes on Oct 12, 2011

I am sorry to say but KODAK is heading to the grave ! The reason is simple : if we look back in the beginning of KODAK as a company they grew due to the supply and demand for their product ( all analog , film ,paper and chemical business ).
There was a world market for their product .Kodak just almost annihilate the most lucrative business they had worldwide .People had to buy film ,they had to by chemicals to process it or pay someone to do so,they had to buy papers,enlarger and a whole bunch of products in order to see their photos .
I'm a photographer myself and i'm shooting digital not but choice but because i was forced into it by Kodak shutting down manufacturing of some of their products .
I've said this in the past and i say it again , Kodak is doomed unless they start reinventing their film ,photographic paper and chemical business .Why ?The reason is simple , all i need today to shoot and view my photos is a digital camera and a computer screen .And online my photos can be viewed worldwide without the need of any Kodak product between me and my viewer .I've only bought two memory cards and i will use and delete as needed for as long as they last .My photos are secure at many online sites ,so there is no danger of loosing them to a fire or water damage or whatever .
My choice for film now is Ilford due to their commitment to their customers and products .If Kodak decide to restructure their film business i will comeback to use their products if fully backed by the commitment they had in the past and full support .I even have considered coating my own glass plates and i know lots of people who are doing it and teaching it in colleges and workshops all over the world .This is a growing business .
About Antonio Perez , who is he ?Does he knows how to use a fully manual camera like a Nikon F3 or a Leica III ? Can he use a 8x10 Field camera ? George Eastman knew his business inside and out and he lead to the top .
Kodak needs to slow down and look back before it is too late .I only use my printer to print documents .In two years i only use it twice for 4 passport photos !!!
Wake up Kodak !!!

 

By Cary Sherburne on Oct 13, 2011

Today (10/13) I read a Motley Fool article http://www.fool.com/investing/general/2011/10/12/5-stocks-that-im-giving-the-boot.aspx?source=ihpsitth0000001 that indicated that Kodak was drawing on its credit line to fund day-to-day operations. Since this was not covered in the interview, I asked Faraci for a comment. Here is his response:

The purpose of the revolving credit line, like any such credit line, is to bridge timing differences between cash outflows and inflows. The use of a revolving credit facility to manage cash flow is a common practice at many corporations. Our cash flow is highly seasonal and the revolving credit line is a tool to help manage that seasonality.

 

By ed lopes on Oct 21, 2011

Well ,than i ask,can Faraci or Perez use a camera on manual settings ?If they don't they shouldn't be administrating KODAK !Is time to get a young photographer to run this company before it goes down the drain .

 

By Chuck Gehman on Oct 21, 2011

Cary, thanks for this article and I'm looking forward to your continuing excellent coverage.

This article changed a lot of what I had been led to believe previously(from reading other less detailed coverage) about Kodak's prospects.

Faraci provided details that I had not known, which do clarify the situation a great deal.

I totally do not care whether or not any executive at Kodak knows how to use a manual camera, by the way. In fact, I would be pleased if they preferred to take pictures with an iPhone.

 

By Alberto Echevarria on Oct 21, 2011

Ed Lopez is so right. But why stop there? If GM and Ford would just stop making those darn automobiles and get back to making a good horse carriage, they would not be have all these problems. And those airlines. They should just buy some ships, so that we can all sail to drupa and look at some good old hot type machines.
Ed, there is no going back.

 

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