IBM’s Krishna argues that AI won’t disrupt software unit

IBM’s Only 2% of his company’s software can be replaced with applications built by artificial intelligence models, CEO Arvind Krishna said as he sought to reassure Wall Street after disappointing second-quarter results.

“The rest of our software really helps people prepare for AI by unlocking data in real time, reducing the cost and complexity of managing data, using the hybrid infrastructure that many of our customers use,” Krishna told CNBC’s “Squawk on the Street” on Thursday. “And since it will be something you can call infrastructure software and not applications, I believe that will be a tailwind for us.”

Wall Street has been skeptical of software stocks over the past few years due to concerns that artificial intelligence will disrupt business models as technologies from Anthropic, OpenAI and others become more powerful. IBM shares are down nearly 30% this year and iShares Extended Technology-Software Sector Exchange Traded Fund (IGV) It fell 17%.

February saw IBM shares fall 13% after Anthropic published a blog post about the Claude Code tool’s ability to modernize code written in Cobol, which is typically found on mainframes.

IBM’s current-generation z17 mainframe ran into difficulties this quarter, Krishna told analysts after the company’s earnings report on Wednesday. Finance chief Jim Kavanaugh said some customers are opting to spend money on other data center equipment like servers and storage as memory prices rise due to AI chip requirements.

IBM receives $3 in software for every dollar of revenue it generates from its mainframe infrastructure. IBM’s Z mainframe business saw a 42% decline in revenue in the quarter, while its transaction processing software also experienced a 9% decline. This was a steep change from the first quarter, when Z revenue increased 48% and transaction processes increased 2%.

In the June quarter, 45% of IBM’s revenue came from software, where profit margins are strongest.

Krishna said Starbucks IBM spends about $2 million a year on its software. He said he removed the coffee machine’s Tririga rental management software. IBM acquired Tririga in 2011 and plans to end support in 2027.

“That’s a big component of the 2% that I mentioned, and I think that type of software is subject to risk,” he said. “Meanwhile, they had 10-year-old software.”

While IBM is sticking to its guidance of a $1 billion increase in free cash flow in 2026, Kavanaugh said Wednesday he now expects 6% to 8% growth in software revenue for the year. He said he was confident the growth rate would be in double digits in January.

Krishna said on Thursday that mainframe hardware capacity is increasing, which has implications for software.

“Software on this tends to lag behind hardware capability, and I think if we give it another year, you’ll see the software get back up to speed,” he said.

About 75 percent of the deals lost in the second quarter should come back to IBM before the end of the year, Krishna said.

“We would refrain from giving full credit to the guidance maintained until a greater portion of slippage activity is reflected in reported results,” analysts at Jefferies wrote in a note to clients on Thursday. They recommend buying stocks.

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