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IBM chief admits failures, sees better times ahead

Chief executive Lou Gerstner recaps several of the company's recent missteps but reiterates that he expects a strong second half of the year.

IBM chief executive Lou Gerstner yesterday recapped several of the company's recent missteps but reiterated that he expects a strong second half of the year.

IBM shares fell more than 5 percent in morning trading today, down $6.25 to $102.75.

In an hour-long address to financial analysts, Gerstner pledged that his restructuring of IBM's businesses would lead to more sales. Despite recent missteps in the company's hard drive business, storage is a key area that will account for 75 percent of new corporate hardware spending. Despite occasional oversupply, Gerstner said storage is a good business, as long as you execute.

"We intend to produce much better results as we move into the second half," Gerstner said in his hour-long address. "More than ever, I am convinced that we are on the right track."

Gerstner did not offer any new financial guidance beyond what the company said in its first-quarter earnings conference call. However, he did note a couple of areas that continue to plague Big Blue, including its effort to produce faster hard drives for large servers.

"We were late; we screwed up the design," Gerstner said. "It cost us in the first quarter, and it's going to cost us again in this quarter."

IBM also has more work to do to revamp its PC division, both in the consumer and business desktop markets, Gerstner said. Earlier this week, IBM introduced the NetVista line, which it hopes will boost sales in both markets.

Late last year, IBM said it would pull out of U.S. retail stores. That move is now complete, Gerstner said, but led to a steep drop in first-quarter sales. According to Dataquest, IBM saw its share of the U.S. market during the first quarter fall by nearly half, to 4 percent from 7.9 percent a year earlier, amid a 41.9 percent drop in unit sales.

Sales of commercial desktops continue to be a problem area and the company will have to cut costs further, Gerstner said. The company has not yet proven it can make money there on a consistent basis, Gerstner said.

"We're going to do what it takes," he said. "We're not going let this business be a drag on the rest of the company."

Gerstner did promise IBM would be resurgent in the midrange server market, a potentially lucrative area where "Sun has had an open field."

Tomorrow, IBM will launch a new line of midrange servers that incorporate features from Big Blue's high-end S80 line, as well as the company's copper-based microprocessors.

"We ceded the market to Sun, but we're coming back," Gerstner said.

The company's Web hosting business is also cause for optimism, where business should double this year, Gerstner said.

Gerstner also took the occasion to jab at competitor Microsoft, among others.

"Operating systems no longer hold the strategic importance they once held in our industry," Gerstner said, adding that they will generate lower margins going forward and lose their power as "control points."