Kodak 2008 results to fall short of expectations

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By Franklin Paul

NEW YORK (Reuters) - Photography company Eastman Kodak Co said its 2008 revenue and earnings will fall short of expectations, because of a dramatic slowdown in consumer spending, and its shares fell more than 10 percent before recouping some losses.

Citing the "deepening global recession" and the stronger dollar, Kodak said on Wednesday its 2008 revenue growth, digital revenue growth, earnings from continuing operations, and cash generation would all fall short of its forecast.

Since late 2003, Kodak has focused on the expanding market for digital devices and services, hoping to outpace declining demand for film.

But consumers are buying fewer electronics as well as scaling back vacations and other events that typically spur use of photography services.

Kodak, which provides commercial printing services in addition to making consumer digital cameras, picture frames, and printers, added that businesses are reducing capital expenditures. Some are finding it harder to get financing for new equipment purchases.

The company also said the stronger dollar is eating into revenue and earnings.

As a result, Kodak said it would cut back on some executive compensation next year in an effort to trim costs. But Bank of America analyst Ananda Baruah said the warning suggests that the company may be mulling even deeper cuts.

"Kodak's removal of guidance -- as opposed to re-setting -- suggests a significantly increased lack of visibility regarding revenue and profits," he said in a client note. "We wouldn't be surprised if the company initiates broader, more formal cost-reduction initiatives at some point in the first half of 2009."

Kodak had already slashed its forecast in late October due to higher raw material costs and sluggish sales in its graphics business.

TOUGH CHOICES

Weakness in the fourth quarter could significantly hurt Kodak's cash position, and influence its investment choices related to growth products, such as its Stream and Nexpress printing lines, according to analyst Shannon Cross of Cross Research.

"We think Kodak will need to make some hard decisions regarding its consumer inkjet business, Stream and Nexpress as investment required to support these initiatives may be too high given deteriorating end markets," she said in a client note.

But in October it cut its 2008 outlook for digital revenue growth to 1 percent to 4 percent, from 7 percent to 10 percent. For the second half of the year it had expected digital revenue to fall by as much as 5 percent.

Kodak said it would cut costs by offering no 2009 salary increases to executives and temporarily suspending some payments to their 401(k) retirement accounts.

Nevertheless, Chief Executive Antonio Perez remained optimistic for Kodak's long term performance.

"We have a solid cash position, a modest debt balance, and, despite current lower overall demand, we continue to maintain our market share in key businesses," he said in a statement.

Standard & Poor's Equity Research analyst Erik Kolb said he was more skeptical, and renewed his "sell" opinion on Kodak shares, and slashed his price target to $5 from $9.50.

"Though we think Kodak has made modest progress toward a more-digitally focused product line, we remain skeptical of its long-term prospects and see limited margin-growth potential," he said in a note.

Shares of Kodak closed down 61 cents, or 8.47 percent, to $6.59 on the New York Stock Exchange, after trading as low as $6.18 earlier.

(Reporting by Franklin Paul; Editing by Derek Caney and Carol Bishopric)

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