It's no secret that I never thought Eastman Kodak's (NYSE: EK) reliance on one-time cash infusions was a smart business model, but the risks associated with such a strategy are plain to see, as recent quarterly results reflect what happens when they dry up.
A bitter pill to swallow
And as is all too common when a management team embarks on a failed policy that brings ruin to a company, it digs in to protect its own interests. Kodak's board approved a misnamed shareholder-rights plan that will dilute current stockholders if someone tries to acquire just 4.9% of the shares of the iconic film and camera company. It had been approached by a private-equity group about making a deal but rebuffed the offer, with management rushing to adopt a poison-pill plan.
CEO Antonio Perez is convinced that Kodak can become profitable, despite posting wider losses in the second quarter -- its fifth consecutive loss.
Trolling for profits
Kodak began using its patents to force tech companies such as Samsung and LG Electronics to cross-license its technology, but the nature of these deals means it needs to keep finding more companies to pursue. Both Apple (Nasdaq: AAPL) and Research In Motion (Nasdaq: RIMM) have pushed back against the notion that they're infringing on Kodak's patents, and earlier this year, an International Trade Commission judge essentially agreed with them.
The film maker had been hoping a decision in its favor would pour $1 billion into its rapidly depleting coffers. A wild card has been introduced now, as the judge, who was expected to issue a final decision in the case by the end of this month, retired. The case will now be assigned to someone else. Although some analysts view that as a favorable move for Kodak, it can easily work against the company, too.
If nothing else, it extends the resolution much further out, and the way things have been going for Kodak, that's not a net positive.
Not a pretty picture
In the latest quarter, Kodak reported sales of $1.4 billion, down 5% from last year, as raw-material costs rose and industry-related volumes declined, leading Kodak to also miss analyst expectations. Not surprisingly, then, margins also compressed and fell short of expectations.
The one area that saw growth was its core printer business, which enjoyed a 48% increase in inkjet printers and ink. Kodak's hoping that by reversing the industry's traditional razor-and-blade business model, it will separate itself from Hewlett-Packard (NYSE: HPQ) or Lexmark (NYSE: LXK), which virtually give away their printers but charge a premium for ink. Kodak's printers are more expensive, but its inks sell at a discount.
How well that strategy works out over the long run remains to be seen, as a challenging economy makes consumers even more leery about shelling out money. Changing how people think about the printer and ink business is a daunting challenge.
Is this patently offensive?
Management also apparently thinks it's going to be a challenge to continue its patent-enforcement strategy. No doubt the trickle of revenues the portfolio brought in raised concerns, but management also probably took notice of how much key industry patents are worth these days.
When bankrupt Nortel had its patents for wireless telecom sell for $4.5 billion, it caught the attention of InterDigital (Nasdaq: IDCC), which also decided to explore what its 8,000-strong patent portfolio would be worth. Kodak, with more than 11,000 patents to its credit, decided it might want to test the market, too. It wants to sell about 10% of its portfolio -- including the one tied up in litigation with Apple and Research In Motion. Some analysts think Kodak's patents are worth more than the company itself.
While on the surface selling the patents might sound like a smart move, to me it seems just like more of the same. The company's looking to raise cash through means that won't produce recurring streams of revenue, including one patent that could be one of its more lucrative tools if the legal strategy proves successful.
Foolish takeaway
I guess stripping away everything else from its core printer business could be effective, as it would help management focus on doing one thing well. But there's no guarantee that even that would be successful, since HP, Lexmark, and Canon (NYSE: CAJ) make the printer business a fairly cutthroat one as it is. That Kodak has chosen to attack the market from a different angle increases the risk all the more, particularly with the structural problems it faces.
I think the one hope Kodak had is also the one it shut itself off from: selling itself to the highest bidder and letting the valuable Kodak brand exist as part of some other entity.
