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

IBM CEO Arvind Krishna said that only 2% of his company’s software could be replaced with applications constructed by artificial intelligence models, as he seeks to reassure Wall Street following disappointing second-quarter results.

“The rest of our software really helps people get ready for AI, unlocking data in real time, reducing the cost and complexity of managing it, going across the hybrid infrastructure, which most of our clients are using,” Krishna told CNBC’s “Squawk on the Street” on Thursday. “And because it would be what you would call maybe infrastructure software, not applications, I believe it’ll be a tail wind for us.”

Wall Street has turned skeptical on software stocks over the past couple years due to concerns that AI will disrupt their business models as technology from Anthropic, OpenAI and others gets more powerful. IBM shares are down about 30% this year, and the iShares Expanded Tech-Software Sector Exchange-Traded Fund (IGV) has dropped 17%.

In February, IBM saw shares sink 13% after Anthropic issued a blog post on its Claude Code tool’s ability to modernize code written in Cobol, which is often found on mainframes.

Krishna told analysts on Wednesday, after the company’s earnings report, that IBM’s current-generation z17 mainframe encountered challenges in the quarter. Finance chief Jim Kavanaugh said some customers chose to spend money on other data center equipment, such as servers and storage, as memory prices spike because of AI chip requirements.

For every dollar in revenue IBM generates from mainframe infrastructure, it picks up $3 in software. Just as IBM’s Z mainframe business saw revenue drop 42% in the quarter, transaction processing software declined 9%. It was a sudden shift from the first quarter, when Z revenue grew 48%, and transaction processing increased 2%.

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

Krishna said Starbucks spends about $2 million per year on IBM software. He said the coffee maker is taking out Tririga lease management software. IBM bought Tririga in 2011, and plans to end support in 2027.

“That is a big component of that 2% I talked about, and I do think that software like that is subject to risk,” he said. “By the way, what they had in place was a 10-year-old piece of software.”

While IBM stuck with its guidance for a $1 billion bump to free cash flow in 2026, Kavanaugh said Wednesday that he now expects 6% to 8% growth in software revenue for the year. In January, he said he was confident the growth rate would be in the double digits.

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

“The software on that tends to lag the hardware capacity, and I do think that if we give it another year, you’ll find the software will catch back up,” he said.

About 75% of deals that slipped from the second quarter should come back to IBM before year end, Krishna said.

“We would avoid giving full credit for the maintained guide until a larger portion of the slipped activity is reflected in reported results,” analysts at Jefferies wrote in a Thursday note to clients. They recommend buying the stock.

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