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.