Kodak Hurt By Q2 Digital Camera Price Compression

Kodak’s Q2 results were hurt by price compression on its low-cost digital cameras, the ongoing transition away from its once-core film business, and other factors, the company said Wednesday, reporting weaker revenue than Q2 a year ago and a larger-than-expected loss. An 11 percent decline to $1.57 billion in Q2 revenue was caused in part by a “negative price mix” in Kodak’s Digital Cameras and Devices business as sales of “lower-end digital cameras” increased, Chief Financial Officer Frank Sklarsky said on an earnings call. Price cutting on low-cost models was due to “competitive pressures,” said CEO Antonio Perez.

But Sklarsky said Kodak “further improved profitability” in Digital Cameras and Devices, “and we expect this trend to continue.” Margins on digital cameras and devices also “improved 8 percent” from Q2 last year, “largely driven by better end-of-life management, improved platforming and increased operational efficiencies,” said Perez.

Sales of the company’s pocket camcorders “more than tripled” from Q2 last year, while digital camera volume “was in line with the prior year,” Perez said. Since the introduction of its pocket camcorders in 2008, Kodak has “been rapidly gaining share” in that category “and we have plans to continue expanding our participation” in that business “in the second half of this year,” he said.

Q2 sales in Kodak’s Consumer Digital Imaging Group fell to $447 million from $503 million in Q2 last year. The loss from operations in that division widened to $110 million from $99 million, due to “expiration of a significant Retail Systems Solutions customer contract and increased advertising investment, partially offset by improved profitability in Consumer Inkjet Systems and Digital Cameras and Devices,” it said.

The company was “forced to increase our advertising budget” because “impulse buying has not come back yet” in the U.S., Perez said. While U.S. spending has grown 3.5 percent this year, “the majority of that has been” spent on products included in “deals, in special promotions -- things of that nature,” he said.

Q2 revenue from all Kodak digital businesses fell 6 percent from Q2 last year to $1.1 billion. But Kodak “continued to see signs of stabilization” in Q2, especially in Asia, Sklarsky said. Kodak is “gaining significant traction” in its new digital businesses, said Perez.

Traditional digital cameras and mobile phones with cameras “are competing already,” but there is “room for both,” Perez said. “The feature set of both types of devices will be slightly different and will appeal to different people,” he said. Kodak’s waterproof camcorder, for example, has been especially popular, he said. “We can’t make enough of those.” When mobile phones started shipping with cameras, “our first impression was that they were going to wipe out the low end of the standalone digital camera, and it did not happen -- it’s not happening,” he said.

Kodak posted a Q2 loss from continuing operations of $167 million, 62 cents per share, versus a $191 million, 71 cents, loss in Q2 last year. For 2010, Kodak continues to expect revenue of $7.5-7.7 billion, it said. It expects digital revenue for the year to come in “at the high end of its previous forecast and full-year traditional revenue slightly below the previous forecast,” it said. The company said in April that it expected to report digital revenue growth of 5-9 percent for the year and overall revenue to be flat to up 1 percent.

Rival Canon said its Q2 revenue jumped 22.2 percent from Q2 last year to $11.03 billion, while profit soared 333.4 percent to $768.61 million. Driving the growth was strong sales of products including Canon’s digital single-lens reflex cameras, it said. Top-selling digital SLR cameras included the new, “competitively priced” EOS Digital Rebel T1i (EOS 500D in the U.S.) and EOS Digital Rebel T2i (EOS 550D), as well as the EOS 5D Mark II and EOS 7D advanced-amateur models, it said. In compact digital cameras, Canon shipped four new ELPH (IXUS)-series models and five new PowerShot-series models, “boosting sales volumes particularly in emerging markets,” it said. Sales volume on digital cameras overall increased 9 percent from Q2 last year, Canon said.

"Economic conditions continued improving” in Q2, Canon said. While “the pace of economic recovery in Europe has remained decidedly modest,” it said the U.S. “continued to record a recovery in consumer spending along with steady export growth, while Japan saw a rapid increase in exports, mainly to Asian countries.” Canon predicted demand for digital SLR cameras and compact digital cameras will “achieve solid growth” the rest of this year. Canon still expects to report sales of $42.61 billion for the year, a 16.9 percent increase over the prior year, and profit of $2.73 billion, an 82.3 percent increase, it said.