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Kodak's Fuzzy Quarter

Rob WalkerPosted Wednesday, Sept. 27, 2000, at 2:21 PM ET

Early yesterday morning, Eastman Kodak held a conference call with analysts in which its CFO announced that it would miss its third-quarter numbers. Word spread instantly, and the company's stock has been positively stomped, falling from about $59 a share to around $40, or about 32 percent, yesterday and today.

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So why will Kodak miss? Is this an omen of further troubles in the rapidly approaching earnings season? Well, what was interesting about the conference call is that while CFO Robert Brust came across as honest, the main thing he seemed honest about is that the company has no idea what's gone wrong. The company's normal pattern, he explains, has entailed a strong finish to each quarter, and as this quarter winds down, it has simply become clear that that isn't happening. If you'd like to hear this performance yourself, it was recorded and can be played back until 5 p.m. ET, Oct. 3 by dialing (719) 457-0820 and punching in access code 986034.

(Actually, if you've never listened to a conference call, this is a fairly good one. The opening remarks last about one minute--whereas in some calls it seems the head of every department gets the floor to blather on indefinitely--before the 40 minutes or so of questions from analysts start. That's the most interesting part anyway since it lets you hear for yourself which analysts ask smart questions, which ones are pointlessly confrontational, which ones weren't paying attention and ask questions that have already been asked, and which ones simply show up late.)

Anyway, the upshot of this particular conference call is that it provides a kind of instant access to uncertainty for Kodak followers everywhere. Brust says there is a problem, and the company is trying to figure it out but hasn't. In fact he says variations on this at least 15 times. "We're out looking now for what's going on." "I'm not sure how we could have really predicted this." "We just don't know what this is." "I'm not sure what happened." "We have to see what it is." "First thing I can do is figure out what happened. ... Not understanding what happened, it's hard for me to go further than that." "Most of our people are surprised ... Everybody's kind of scrambling around." "We're in a big derailment right here, and we're trying to figure out what it is."

"Good luck," one analyst says in response to that last comment.

"Thank you," Brust replies and then adds, somewhat incredibly: "We'll need it."

So is it useful to know, right from the top brass and practically in real time, that the top brass hasn't really figured out the problem? Yes and no. Obviously it's very difficult for any investor to make a real judgment about Kodak's business without knowing whether the problem has to do with fixable mistakes or a secular shift in consumer habits.

On the other hand, it seems to me that it's worth knowing, in no uncertain terms, that Kodak has left itself open to being taken so drastically by surprise. As Brust noted in response to one question, relying on a giant revenue surge in the final weeks of every quarter to make the numbers is "probably not a best practice."

The big picture conclusion, then, would be that it's probably a good thing that public companies are making it easier and easier for investors to hear such statements and evaluate them directly. But if you actually owned Kodak shares, of course, the big picture isn't particularly important right now: It's pretty hard to actually applaud any company for being honest about its own cluelessness.

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Reader Comments from The Fray:

Every pro photographer knows that Kodak has gone badly astray--their product line-up makes little sense, their products are usually inferior to Fuji and Ilford, their service and sales are near non-existent, and they mysteriously make key products disappear in favor of inferior alternatives. Their sallies in Digital technology make so sense as they are off-standard and serve neither the consumer market (too expensive for the technology delivered and weak products--think U.S. TV makers of 20 years ago) nor the professional market (not up to the competition in terms of quality and specs). As for the consumer division forget it. Their processors are being beat hands down by Agfa and Fuji mini-lab processors, and their printing papers are slipping. About the only thing they have going for them is consumer recognition of the brand, and the U.S. consumers propensity to pick up those yellow boxes when looking for film. But the consumer market in the U.S. is so cut-throat there are no margins to be had, even if you are a winner.

--Photo Shooter

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I keep trying to figure out why investors, both single and institutional, keep clamoring for candor, and then proceed to hammer a company when they get it? Do we only want frankness when the message allows us a Hallmark (or perhaps I should say Kodak) moment? The fact is that this market is crazy. Predictors that were pretty stable just 5, or even 2, years ago, no longer accurately forecast trends. The behavior of the market is erratic and so often just plain unexplainable. There are new variables to consider and mitigate that just plain didn't exist not so long ago. And no, not every company is on top of all these changes all the time. Even the leanest, most agile firm sometimes looks around at the playing field and says to itself "what the he@# is going on here?" In recent years, some companies that have had exceptionally strong quarters, or even years, look sheepishly, if pleasantly, startled, and admit they had no idea why they did as well as they did. This sort of cluelessness is often richly rewarded by investors--who, as long as the stock price keeps on marching upward, care little to nothing about the alchemy that got it there. That same endearing clueless charm can quickly freeze like the proverbial deer-in-headlights when the stock hits a rough spot, or even just plateaus, and the know-nothing attitude comes right back to bite them in the keister.

Investors who are happy to play along with ignorance when things are good are far less merciful when that ignorance hits them in the portfolio. At the end of the day, does it concern me that Kodak brass seems so, well, blind to what's going on? Yes. But two things may well be going on. One is that they know what the issues are, and have a plan in place that they don't want anyone to know about just yet, so they fake a Forrest Gump-like dullness. That's not bloody likely. What's more likely is that they have a handle on what the problems are, and are trying to mitigate them, using both tried and untried methods. The fact that Kodak was able to find so many factors and has yes, the guts to be candid about them, tells me that they are at least doing good prelim work and that should count for something.

--Lacie

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