Getting Kodak To Focus

"I like change," says Eastman Kodak CEO Daniel Carp. "I'm one of those people that has to have change." Good thing, because Kodak has had plenty of it. Carp is now well into the monumental task of dragging the iconic American company that invented consumer photography more than a century ago into the fast-moving, low-margin world of the digital era. He has little choice. As digital cameras have grown in popularity, Kodak's profitable film business has gone into free fall. Not the first Kodak CEO to try to refocus the company on the digital future, Carp is clearly taking the biggest risks. He put his marker down 16 months ago when he announced that Kodak would cut dividends, slash investments in its film business--and milk its declining profits to fund $3 billion worth of acquisitions and investments crucial to the digital transformation. The market response was swift and brutal: Kodak's stock price plunged 18% that day to a 20-year low. Carp followed up with a plan to eliminate nearly a quarter of the company's 64,000-person work force by 2006. Still, Wall Street analysts doubted that Kodak, with its legacy culture and reputedly ossified management, could match the pace set by its lean digital competitors. How could it generate sufficient profit from digital sales and cut costs fast enough to offset the precipitous decline of its primary source of profit?

Today such skepticism on the Street, if far from gone, is tempered by pleasant surprise. A year after Carp launched the restructuring, Kodak has lined up a respectable portfolio of increasingly lucrative digital products and services. The company, based in Rochester, N.Y., lost $12 million in the last quarter of 2004, but that was largely because of restructuring costs. Meanwhile, its revenues actually climbed 3%, to $3.8 billion, in that period--the 16% decline in Kodak's traditional film business offset by a 40% surge from its digital sales and services. Yet there remain ample reasons for doubt. For one thing, Carp has promised a pretty picture: $16 billion in revenues by 2006, up from $13.5 billion last year, with more than half of that coming from its digital endeavors. He also says the company's profit margin will drop from roughly 40% to 30%--and no further--and serve up $3 in earnings per share, vs. last year's operational EPS of $2.62. To longtime Kodak watchers, this optimism smacks of old times: Kodak trumpeted its digital aspirations nine years ago--and failed to deliver, unable to wean itself from traditional film businesses and their 60% margins. Is this just another false start? "Everybody's been skeptical," says Carp, "except we've put the numbers on the board."