Gerstner upbeat on IBM's retreat from networking

Big Blue's CEO opened remarks to analysts on Tuesday by praising the company's decision to exit the switching and routing business.

Giving his annual address to Wall Street investors and analysts, Lou Gerstner, the steely chairman of IBM, said that selling off the firm's networking hardware business last year to Cisco Systems is "paying off big time." He claims the deal means a lot of money to IBM in terms of OEM sales, and services provided to Cisco customers.

Gerstner also praised two other strategic retreats that affected short-term revenue but that will make IBM's portfolio a profitable one in the long term. One is the sale of the IBM Global Network to AT&T; the other is the move to ease out of the dynamic random-access memory (DRAM) chip market in favor of selling more complex and profitable semiconductors. Additionally, the company is continuing a "massive restructuring" of its ailing PC business in the hopes that it "will slash our cost structure even further."

He downplayed a disappointing first quarter that saw a 5 percent revenue decline to $19.3 billion, claiming that IBM "fundamentals remain very sound." One such fundamental is the pursuit of e-business. "This isn't like some of the prior transitions that our industry has gone through," said Gerstner, "when IBM was forced to play catch up. We were first to this one."

IBM stands poised to deliver mainframe and high-end Unix servers to companies looking to engage in e-business. "Demand for this class of server is going to grow as customers' e-business applications become more transaction driven," he said. There will also be growth in the appliance servers that sit on a network's edge and are dedicated to specific tasks, such as caching or managing wireless devices. He boasted that the RS/600 S80 Unix server, introduced last year, has been a success and outperforms similar Sun boxes. Later this week, the company will announce more midrange Unix boxes.

On the mainframe side, he said that later this year IBM will be announcing "Freeway," the next-generation S/390 that will be able to do "very, very sophisticated load balancing to handle huge-business workloads with unpredictable peaks."

Seventy-five percent of all money spent on hardware will be for storage products; about 70% of that will go to high-performance storage-area network and network attached storage product areas where IBM is trying to build momentum against competitor EMC, according to Gerstner. He claimed the IBM Shark enterprise storage server line is making headway against EMC's Symmetrix line.

While host operating system revenue continues to decline, companies are going to need ever more middleware to integrate their existing business processes and applications with the Web. There, IBM is one of the market leaders, with offerings such as the DB2 database and MQSeries application messaging products.

While the $30 billion IBM Global Services division saw a growth slowdown last quarter (a flat $7.6 billion in revenue), that is just a "blip" in a strong 7-year track record, noted Gerstner. "Services is the best part of the IT industry," he said. He closed by telling analysts he still felt "very good about this year....we are now ready to exploit this e-business opportunity that we have been investing very heavily in over the last few years."

Gerstner's remarks apparently did not comfort investors. Wednesday morning, IBM shares dropped 5 points to 103, according to the Associated Press.

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