updated 7/20/2005 3:25:12 PM ET 2005-07-20T19:25:12

The digital revolution dropped another bombshell Wednesday on Eastman Kodak Co.’s already beleaguered work force.

Even as Kodak speeds down the digital-photography highway, the picture-taking pioneer is struggling to cope with a sharper-than-anticipated drop in demand for conventional silver-halide film — its cash cow for the last century. Its solution: Axe 10,000 more employees.

The newest job cuts, on top of 12,000 to 15,000 targeted 18 months ago, coincided with the disclosure of a quarterly loss — its third in a row — and its stock dipped more than 5 percent.

Kodak missed Wall Street forecasts by a wide margin, largely because of a steeper-than-expected slide in film revenues — even in emerging markets such as China. It lost $146 million, or 51 cents a share, in the April-June quarter, compared with a profit of $136 million, or 46 cents, a year ago.

Sales grew 6 percent to $3.69 billion from $3.46 billion in last year’s second quarter.

Excluding restructuring and research charges, plus a $19 million charge for reducing the value of an investment in China’s Lucky Film Co., Kodak posted earnings from continuing operations of 53 cents a share. Analysts surveyed by Thomson Financial had forecast earnings of 80 cents a share.

“I don’t need to change our overall strategy — the further we get into this, the better the strategy looks,” Kodak’s new chief executive, Antonio Perez, said during a conference call with analysts. “But I need to dramatically accelerate some of the steps needed to get there.

“Sales of our consumer traditional products are declining faster than expected,” he said. “Although we have been moving rapidly to get our costs down ... we are picking up the pace dramatically. This is what the company needs to succeed as a digital company.”

To fortify its swelling digital businesses, Kodak is slashing deeper than it set out to do in January 2004. The new cuts will include 7,000 manufacturing jobs, many in Kodak’s hometown.

“It’s a company now oriented toward having others make everything else for them, and concentrating on research and marketing,” said Ulysses Yannas, a broker for Buckman, Buckman & Reid.

Up to 25,000 cuts by 2007
Kodak now plans to dispose of 22,500 to 25,000 jobs by the middle of 2007 and trim its traditional manufacturing assets to about $1 billion, down from $2.9 billion in January 2004.

The overhaul will shrink Kodak’s global payroll to less than 50,000. It had 54,800 employees at the end of 2004 — down from 75,100 in 2001 and a peak of 145,300 in 1988 — and has eliminated 3,850 jobs already this year.

Kodak said it is adding thousands of jobs this year, after wrapping up in January a nearly $3 billion shopping spree to expand its reach as a digital heavyweight in photography, medical imaging and commercial printing. Kodak has declined to quantify exactly how many jobs the acquisitions would be adding.

With the era of soaring sales and fat profits from chemical-based businesses now departed, Kodak expects digital technology to become its biggest source of revenue this year for the first time.

In the second quarter, sales of digital products and services in all its businesses rose 43 percent to $1.843 billion, helped by a sharp rise in sales of cameras, kiosks and thermal printers. In contrast, revenues on the analog side dropped 15 percent to $1.843 billion — exactly in line with digital sales.

Kodak said its digital sales in June exceeded traditional revenues for the first time ever. Hurt by falling traditional sales, even in China’s more affluent, coastal regions, Kodak now expects its traditional sales to plunge 23 percent to 27 percent in 2005, compared with a 20 percent drop forecast in April.

Health imaging sales rose 3 percent to $694 million, reflecting better-than-expected traditional sales. Graphic communications sales soared 144 percent to $794 million, largely because of Kodak’s buyout this year of Sun Chemical Corp.’s 50 percent stake in a jointly owned commercial graphic arts business.

Digital accounted for around $5.5 billion of sales in 2004, but could vault as high as $8 billion this year. Chemical-based businesses will account for around $6.6 billion, down from $8 billion in 2004.

Founded in 1881 by George Eastman, Kodak turned point-and-shoot photography into an overnight craze when it came out with a $1 Brownie camera in 1900. A century later, the swift shift to digital looked to have caught it off-guard. Kodak insists it was waiting for a mass market to clearly develop, and it has since captured the top spot in the U.S. point-and-shoot digital camera market.

“They’re No. 1 in just about everything they compete in except for commercial digital printing,” Yannas said. “They’re No. 1 in health care, in cameras, in home printers. Hewlett-Packard, IBM’s been doing the same thing. It’s a question of adjusting their model for the digital world.”

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