Yesterday, Jan 9, 2018, Kodak's market cap jumped from around $120 million to $289 million and as these notes are being penned its market cap is north of $500 million.  What a difference an announcement makes...

On Tuesday Kodak announced an initiative for "a photocentric cryptocurrency to empower photographers and agencies to take greater control in image rights management".  It is a partnership with WENN Digital, which in turn is a venture between WENN (a UK based Celebrity and Entertainment News Agency) and Ryde GmbH, Germany.  Ryde was founded by Jan Denecke, a lawyer specialized in media and copyright law.  Ryde (google "Reward Your iDEas") apparently has software that finds unlicensed material on the internet, politely informs the web site owner of the infringement and collects the settlement.  This technology will probably be the policing element in the beautiful new world of digital rights licensing with Kodak Coins for payments.  UPDATE: www.rewardyourideas.com now forwards to the WENN Digital page.  Here is a last screenshot:

While the details are still a little murky, it appears that the system will be built on the Ethereum blockchain, which has been designed to handle business transactions, digital asset transactions certainly being prime candidates.  The Ethereum blockchain has its own crypto-currency Ether, which could certainly be used for payments, but "Kodak Coins" may resonate better with photographers and help the acceptance of the system.  So it looks more like an opportunity for Kodak to monetize its remaining brand value, rather than a technology contribution.  While WENN Digital is handling the business, Kodak will get an unspecified royalty from all transaction and will start its own "coin mining operation" in Rochester.  The term "coin mining" is somewhat misleading.  Crypto currencies require consensus based certification of each addition to the blockchain.  The computers providing that service - and using lots of energy in the process -  get rewarded with new coins.  I am speculating, but somebody has to provide the service for a new coin until the big boys get interested.  With Bitcoin mining using as much electricity as Denmark (some 32 TWh), becoming a player in coin mining would be a real change for Kodak.  

All in all, it looks like a very clever idea, designed to be disruptive to photography agencies like Getty Images.  Of course, one cannot help but wonder how a Berlin company with a $100,000 loan got be at the center of this Kodak moment.  

While the terms of Kodak's royalty deal are unknown, the increase in value of over $200 million, following the announcement, seems to be a little optimistic.  In any case, it set the clock back by about two years and some investors will surely use it to get out alive.

In the long run it might be more interesting to follow WENN Digital and its shareholders, including the pink sheets company ICOX.

On March 30th the Supreme Court overturned a previous patent win for Lexmark and ruled that once a patented item has been sold once, the patent is "exhausted" and can no longer be enforced.

The full opinion can be found here.
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Printers, being used to buying consumables for their offset equipment independent of the equipment manufacturers, have always balked at the idea of being tied to one manufacturer for ink.  With inkjet ink exceeding the cost of a good French or Californian bottle of wine, it is certainly understandable that companies are looking for the lowest cost supplier. However, the idea of loosing your warranty if you get caught using cheaper ink has been an effective deterrent and chip coded cartridges have not made it easy to live outside the rules.

Of course, we also know that for a process as complicated as printing (digital, offset or any other variant) to work well, control of the environment is key.  How many complaints about print quality have been reduced to paper quality, ink tack or other consumable parameters and how often has an inferior third party spare part with the same geometry (special grease filled bearings come to mind) been found to be the cause of an equipment breakdown?

So, there are clearly two sides to the issue.  But with this ruling, printers are now free to wander off the reservation of their HP or Kodak approved supplies and the days of a business concept based on "lifetime margin", giving away the equipment and generating the margin on the revenue stream of supplies, are probably over.

Digital printing equipment is now being treated just as other printing machinery has been treated forever.  Chief Justice Roberts used the auto industry as an example where manufacturers cannot control what people can do with a product after the sale.  

It will be interesting to see if somebody will challenge the closed "eco systems" like Apple's down the road.

A look at the recent results of the major offset equipment makers confirm that life continues to be difficult for the industry.  While the cost reduction efforts appear to pay some dividends, the overall market continues to be in a continuing decline.  Last year's DRUPA effect was dampened by the continuing weakness of the Chinese and Brazilian markets.

Manroland Sheetfed recently communicated upbeat news, but the 33% drop in backlog compared to 2015 suggests that orders dropped from Euro 323 million to below Euro 290 million in the DRUPA year, about half of what Heidelberg typically books in a quarter. 

Heidelberg's equipment segment saw quite a bump at DRUPA, but the next two quarters were business as usual, at best.  The chart below compares quarterly orders for equipment and services.  

It is no secret that all manufacturers are looking to increase their services segment to reduce cyclicality and a look at operating performance shows the struggles Heidelberg still has to make money with its machines, despite its leading market position.  

The Euro 60 million peak in Q1/15 (Q4 of HD's fiscal year) was driven by blow-out sales of Euro 518 million, followed by average quarterly sales of Euro 309 million for the following seven quarters, leading to the not-so-special insight that manufacturing volume is the key to profitability.  Given an even better backlog position than at the end of 2014, another big fourth fiscal quarter (followed by the usual trough) is certainly possible, however the question remains if the equipment segment can generate performance if quarterly sales settle in at Euro 300 million or below in the future.

KBA's fourth quarter results are not yet available, but comparing the last four quarters at the end of Q3 with the same period a year earlier, sheetfed and web orders dropped some Euro 90 million each, or 15% for sheetfed and 41% for web orders, another sign that the market was challenging in 2016.  Once the full year numbers become available I will update the overall comparison of the major offset players. 

 Q2 reports are out and provide an opportunity to compare the usual DRUPA hype with the numbers.  Conversations at the show  appeared to confirm that the future is digital and the present is offset, however the absence of any web press confirmed the rather sobering outlook for that segment of the industry.  Of course, this week's report of further drops in global newspaper ad spending will not fuel optimism for high volume printers.    
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Jefferies predicts an even steeper drop. For Gannett and News Corp, they estimate combined print and digital ad revenues will decline 12.5% and 7%, respectively.   According to GroupM, magazine ads will fair better and only drop 2.9%.  Oh well... (Of course, this also means that printers will work on reducing cost, and, while not adding press capacity, will probably invest in automation for material handling etc.)

But back to DRUPA.  Business for the sheetfed manufacturers appeared to be solid at the show, driven mostly by packaging.  The graph below shows total orders for the main players in sheetfed, but should be taken with a few caveats. KBA orders include the web and special segments.  Sheetfed orders are about 44% of the total.  Ryobi/Mitsubishi, now rebranded as RMGT (RYOBI MHI Graphic Technology is a mouthful...), only reports sales and Manroland sheetfed provides only limited insights, so I had to apply some estimates.

Yes, the quarter is up, but does this mean better times ahead?  Heidelberg's long-term quarterly orders have always provided a clear illustration of the DRUPA effect, and it is also visible in 2016. However, it should be noted that the DRUPA peaks are lower and lower, and this year Q2 orders were about 10% lower than at DRUPA 2012. For equipment alone, the drop from last DRUPA was a sizeable Euro 100 million!

Obviously, quarterly orders have stabilized for Heidelberg over the last few years, but it remains to be seen if the next quarters will continue to come in around the 600 million Euro level or will be lower again. The well known weakness in China is certainly holding all manufacturers back, as illustrated clearly in the graph from Komori's quarterly report below.

Following DRUPA, Heidelberg reports "Incoming orders of € 804 million boost order backlog by 67 percent."  True, but equipment shipments for the quarter were low at Euro 215 million, or 54% of the previous quarter, which happened to be last quarter in the fiscal year and resulted in a low beginning backlog.  As pointed out before, HD equipment orders were actually Euro 100 million lower than in the DRUPA 2012 quarter, clearly a sign for concern. On the positive side though, compared to the average of the preceeding four quarters, equipment orders were up over 40%.  The same cannot be said about HD's competitors.

A look at KBA's recent quarters indicates that the market remains challenging.  While overall orders were up 20% over the average previous four quarters, sheetfed orders were actually down some 6.5%, not exactly what one would expect in a DRUPA quarter.  (KBA expects that 2/3 of DRUPA orders will be booked in Q3.)

Using the same measure, Komori's sheetfed orders were down almost 14%.  The company also reported  its first quarterly loss in 3 years.  So did its smaller rival RMGT, suggesting that pricing for the Japanese suppliers is more difficult in a strong Yen environment.

All in all, I will not be surprised if, in a couple of years, we will look at DRUPA 2016 as the beginning of the next down cycle for printing equipment.  I hope that I am wrong. 

That may have been what the participants of last Friday's Kodak Analyst and Investor Day may have asked themselves in case they know the title of the British comedy game show.

Apparently investors did not like what they heard and reduced the stock market value of the company by some 36% over the next three sessions.   

The - in Kodak's case not exactly new - explanation is that the  old cash cow businesses continue to shrink faster than anticipated and the new growth businesses do not grow fast enough.  Revenue guidance for 2015 is now $1.8 to 2.0 billion, compared with $2.7 billion under the long scrapped 2013 post-bankruptcy plan.   Beyond that some quite interesting details were discussed.  

New Prosper 6000 machines average about $3.5 million in sales value and currently still generate a loss, but it supposedly is still a great business because of about $1 million in annual ink and services provided by Kodak.  While I have always been impressed by Kodak's Stream technology, one has to ask if this cost model will really allow Kodak to convert many of the "old iron" sheetfed and web presses to digital, or if printers will invest only when they need to print variable data.  For most printers cost per copy is still the magic word.  Let's also not forget that these machines fit somewhere in between sheetfed and web when it comes to plain productivity, so the real addressable market for this remarkable technology may be smaller than hoped for.
  
In terms of complete systems Kodak is planning to install some twenty to twenty five machines in 2015, compared to 39 over the last four years.  That is progress, but probably does not help move the needle that much short term.  Management emphasized the opportunity to install Prosper heads on existing offset presses and noted that of the roughly 70 trillion pages printed per year globally 69 trillion were still printed offset.  Being a little careful on global statistics in this industry, I can only hope that somebody double checked that number ;-)

The continued delays in getting the growth businesses to take off resulted in further negative cash flow, apparently including some customer financing to jump start growth.

All in all cash has gone down from $844 million after emerging from bankruptcy to $521 million at the end of September.

The published results for the first half of 2015 show an improved order situation for the major printing equipment manufacturers, albeit far below the levels of before 2009. 

Heidelberg shows the biggest overall increase and continues to be the undisputed market leader by sales volume.

In terms of profitability the picture is also turning for the better.  Having been profitable every quarter since the end of 2012, Komori has clearly adjusted fastest to the smaller market for printing equipment.  

Heidelberg reported a black zero in March '14 but continued restructuring in 2014, resulting in a net loss despite improved operating income.  But it is a first in a number of years that Heidelberg achieved a positive operating result in the first quarter of this fiscal year.  With increasing orders and backlog, profitability for the year should not need to depend on a blow-out fourth quarter.

KBA continued the same "weak first fiscal quarter" pattern, even though the company has a different fiscal year than HD.  While the second quarter was positive, the year-to-date operating results are still in the red.  After much debate the company is now reporting its web and special press results separately, confirming its diminished role in a much smaller web offset market.  The Special business segment includes KBA's envied security printing business (as well as flexible packaging and metal decorating) , but reported a modest EBIT of Euro 3.6 million on sales of Euro 170 million.  Maybe an indication that Komori's efforts to become a serious competitor is paying off.  Komori reported a security press order in each of the last four years.

With all the gloom and doom in the world the new order development is positive.  Of course, the exposure to the Chinese market is risk that everybody is certainly aware of.

This statement stood out for me in today's WSJ article commenting on the likelihood of further consolidation given the political meddling at a national level in the global auto industry.

I have not posted anything since January, quite frankly because my reports and comments on some of the major players in the industry started to sound repetitive.  The sheetfed market leader Heidelberg every year seems to work its way through three meager quarters and manages a strong fourth to report results that are far away from sound profitability.  "Kurzarbeit" (short work hours) appears to have become a normal capacity management tool for the German part of the industry, instead of the originally intention to use taxpayer money as an exceptional measure to help companies weather a temporary low cycle. 

Order announcements for the web offset equipment makers are conspicuously rare and offer an indication that their customers are still more focused on consolidating the industry than upgrading their equipment. 

And the promised land - digital printing - is maybe not as promising as originally hoped for.  Kodak's share price development since the beginning of its new lease on life may be an indication that the market is questioning the potential of the commercial printing perspective.  (Tomorrow's earnings' call will hopefully provide new insights.)

Market information is limited and HP's last press release from 2013 stating a number of 100 inkjet presses installed since 2009 is surely outdated. But the relatively low number (even adding the 6,000 Indigo machines that were installed over a much longer period)  makes you wonder about the longer term strategic relevance of commercial digital web printing for a company with $111 BILLION in annual revenue. 

It is now seven years since DRUPA 2008, the event that marked the beginning of the dramatic contraction of the printing equipment industry.  While the companies themselves have shrunk and some have even gone through bankruptcy processes, the basic landscape of the industry has not changed.  I find that quite surprising after seven years, especially since the industry is small enough that political objections - like in the auto industry -  would probably be minimal. Normally one would expect investors to drive more consolidation, that is of course only if they believe the industry can provide a return on capital.  

2015 promises to be another year of surprises, hopefully bringing more good than bad ones.  While I leave the forecasting to the professional tea leaf readers, it is always worth taking a look at currencies this time of year. 

The chart below shows the development of the Japanese Yen (green) and the Euro (blue), both vs the US-$ over the last 10 years.

The black line in the lower box depicts the Euro-Yen relationship.
Obviously, the dollar has appreciated against both currencies over the last half year, but for the last two years the Yen valuation has been completely reversed and a Euro today buys 145 Yen vs about 100 Yen two years ago.  That won't make life any easier for European manufacturers competing with Japanese companies, never mind US digital or offset equipment makers.
However, with the US-$ being the strongest since DRUPA 2012 and the US economy having an overall improved outlook, US printers may well look at ending their capex hiatus and modernize their plants again. 

With the web offset press market continuing its downward slide towards irrelevance in the sub $500 million range and sheetfed being flat to negative (orders in China are apparently less plentiful these days...), I was hoping to find some more upbeat news in the digital printing arena. With digital equipment makers reportedly being the most visible exhibitors at this year's Graph Expo, there is clearly interest in the technology and one would expect to see continued growth driven by new technology, such as Kodak's Stream technology.  

Kodak emerged from bankruptcy in September 2013, so I took a look at how the company is doing one year into its new lease on life. With over $2 billion in annual sales, Kodak remains one of the big players with a true focus on commercial printing.

To keep things simple, I'd paraphrase the strategy as "milk the shrinking  Graphics, Entertainment and Commercial Films business (GECF) while growing the Digital Printing & Enterprise business (DP&E). (A presentation with the graphs below can be found at Kodak's investor site.)

A year into the plan, it appears that GCEF so far has shrunk somewhat faster than planned but the strong third quarter demonstrated the importance the segment has for the overall business.

Somewhat more concerning is the lack of growth in the Digital Printing & Enterprise segment and with 9-months sales of just under $500 million with quarterly sales being flat at just below $170 million.  It looks more and more likely that the segment will not even reach the 2013 levels.

The company reaffirmed full year sales between $2.1 and $2.3 billion, however this will be short of the $2.6 billion laid out in the original plan.

At $744 million, cash is about $100 million below the original plan.  Cash flow from operations is negative ($136 million),  but has been close to neutral for the third quarter, possibly signalling the needed turn-around. 

Kodak is betting on growth in its DP&E segment and it is too early to say if the strategy will work or not.  The next couple of quarters will show if the company can turn the promise of its strong digital printing technologies into sales and earnings or if it will need to rely further on its shrinking plate and commercial film business.

While the stock price development was not pretty during 2014, there seems to be some recent optimism again.

Hopefully, this is an early indication that the 4th quarter will yield results supporting the company's strategy.  For the record, I do not own any shares in the company, nor do I plan to buy any in the near term.  And of course, I am not providing any investment recommendations.