It's no surprise that Kodak (NYSE:EK) is trying to reinvent itself as a major player in digital photography. From branded products to photofinishers touting prints on Kodak Paper, this is where the film giant hopes to drink up the fountain of youth.
Today the company updated investors on its progress toward that end. The company sees operating profits from its digital business (which includes the consumer side that most of us are familiar with, as well as the health-care imaging group) soaring by 300%. It sounds impressive, although it will miss the company's original projected range of $275 million to $325 million. This will happen despite digital revenue growth exceeding its 2005 target of 36%. In other words, business is good, but not quite as profitable as first expected because of tighter margins along the way.
This will be the first year that the company's digital business takes up a thicker slice of the revenue pie than its traditional film business (which will be off by better than 17% in 2005). It's not much of a surprise since, if you're like me, you can't remember the last time you bought a roll of film. Nowadays it's just a matter of filling up your SanDisk (NASDAQ:SNDK) memory card with snapshots, copying them over to your computer, and then gutting the storage space to start all over again.
It's not the way Kodak would like it to be. Disposable film sales were great before the dawning of digital cameras. You were a repeat customer for life. As it stands, the company sees gross profit margins for its traditional and digital business coming in at 30% apiece by 2008, so it's not as though Kodak is looking for its digital future to bring back fat margins. Kodak's salvation on the consumer side is for folks to become so enamored with their digital snapshots that they process them in bulk, though how big a market that is remains to be seen.
For starters, digital prints can be shared digitally. Even with photo-finishing price wars driving down the price of digital prints to just pocket change, many people are content to just gaze at them on their monitors for free. It's why social networking and blogging sites with a multimedia slant such as Intermix's (AMEX:MIX) MySpace.com have grown so quickly while photo-sharing sites with an emphasis on purchasing prints such as Yahoo! (NASDAQ:YHOO), Kodak, and Hewlett-Packard (NYSE:HPQ) haven't kept up the pace. You also have a plethora of digital camera mobile phones and low-end cameras with low resolutions that come out too fuzzy if printed.
Lastly, you have printer companies like HP and Lexmark (NYSE:LXK) allowing you to ink your own prints at home. So it's not like the old days when Kodak's primary concern was battling fellow film giant Fuji (Nasdsaq: FUJIY). These days, the competition is everywhere. It's going to be a challenge, but at least we know Kodak isn't going down without a fight to the photo finish.
Longtime Fool contributor Rick Munarriz really can't remember the last time he bought a roll of film. He does not own shares in any of the companies in this article. T he Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
