By Susan Kelly July 26, 2005 -- Kodak (NYSE: EK) held their second quarter earnings call today. Following on the heels of HP’s major restructuring announcement, Kodak has announced that it will increase the cuts it announced in January by as many as 10,000 to a total reduction of as many as 25,000 by the middle of 2007. Included in the updated restructuring are plans to cut traditional manufacturing infrastructure from $2.9 billion to $1 billion, cementing Kodak’s move to a digital structure. Second quarter revenue for the company was $3.686 billion, up 6% from the same period last year. The company posted a net loss for the quarter of $146 million, or $0.51 per share. Last year the company’s net income was $119 million, or $0.40 per share. Kodak CEO Antonio Perez said that the demand for the company’s traditional products was declining faster than expected, forcing the company to more aggressively make the transition to digital and streamline its cost structure. Topics of this Summary Quarter Highlights Segment Performance Guidance Raine Radar Q & A Quarter Highlights January restructuring plan updated to include the shrinking of traditional manufacturing and an additional 10,000 positions cut. Debt increased $1.4 billion to $3.721 billion from six months ago due to acquisitions. Cash levels were down from $1.255 billion to $533 million. Acquisitions of KPG and Creo completed. According to the company, the integration of those businesses is going according to plan. Gross profit was 29%, down from 31.8%. Selling, general, and administrative expenses were down slightly to 17.6% from 17.8%. Segment Performance Digital and Film Imaging Sales for the group during the second quarter were $2.151 billion, down 12%. Operating earnings were $193 million, down from $229 million last year. Sales of digital equipment for home printing were up 63%, digital capture equipment saw a 25% increase, and the use of Kodak picture maker kiosks was up 24%. The sale of analog equipment and related media continues to see a precipitous decline. Graphic Communications Sales for this segment were $794 million, up 144%, due mostly to the acquisition of Kodak Polychrome Graphics. Increased sales at Versamark and NexPress were also cited for the increase. Operating loss was $33 million. Health Group Sales for the group were $694 million, up 3%. Operating earnings were $113 million, down from $124 million last year. Digital growth in this group was less than expected, although this was offset by better than expected analog sales. Other Sales All other sales in the company were $47 million, with an operating loss of $43 million. Guidance Perez announced during the call that due to the nature of the business and industry during its shift to a digital structure, the company would no longer provide earnings per share guidance information. Instead, the company will rely only on net cash from operating activities, and digital revenue and earnings. For the 2005 fiscal year, Kodak expects net cash from operations of $1.0 billion - $1.2 billion. The company also expects approximately 36% growth in digital revenues with digital earnings of between $275 million - $325 million. Raine Radar The coincidences are too great to be explained any other way. Both HP and Kodak announce huge reductions in force within 24 hours of each other. Both companies have significant strategic and financial investments in the digital print world. Could it be a case of a maturing market that is looking for consolidation? Maybe it’s time for HP to sell off Indigo to Kodak, get out of the production digital print markets, and focus on the office and consumer markets. Maybe it’s time for Kodak to consolidate all its acquisitions and restructure all their hardware, software, workflow, and consumables to reinvent the end-to-end supply chain and dominate the production market to give Xerox a run for their money? Kodak will have to move much faster and more aggressively if they hope to fill the widening gap of the accelerated decline of the yellow box. So maybe with the Perez-HP connection there’s an opportunity to think even bigger; which is Kodak and HP working together on end-to-end consumer solutions for digital photography. Q & A Kodak plans to continue to monetize the IP coming out of R&D primarily through licensing and partnerships. The mix of equipment and consumables for the kiosks has reached about 50-50, and as the install base grows, the annuity stream associated with consumables is expected to become the larger portion of revenues. Retailers are beginning to look to reduce the space used for film, including removing film brands from shelves. Kodak sees this as a benefit as their brand leadership will keep them on the shelves while competition is stripped away. Analog infrastructure will be reduced globally. Film decline is happening faster than anyone expected and is affecting the company’s ability to measure and therefore predict future traditional revenues and earnings. Digital camera sales will be profitable in 2005, but margins are expected to be low. Perez noted that this strategy was a key enabler to promoting higher margins through kiosks, and home digital printing equipment and consumables. For the Versamark product line, approximately 1/3 of profits come from equipment sales, 1/3 comes from ink, and 1/3 comes from service. For 2005, Kodak is expecting to spend $600 million – $650 million in cash on restructuring. This should be the peak year for restructuring costs. During restructuring, Kodak expects to more closely align manufacturing to its business units. Photo finishing revenues are significantly less, but the loss figure should be dramatically better in 2005 over 2004. Approximately 20,000 employees are currently in traditional Kodak analog production. Kodak hopes to create a manufacturing structure that is more flexible between products than it is today.