IBM CEO: AI Won't Disrupt Software Business, Only 2% at Risk of Replacement

According to CNBC, IBM (IBM-US) CEO Arvind Krishna said only 2% of the company's software could be replaced by applications built using artificial intelligence (AI) models. He made the comments to reassure Wall Street after a disappointing second-quarter earnings report.

In an interview on Thursday (23rd), Krishna said, "The rest of our software is actually helping customers prepare for AI, including real-time data release, reducing the cost and complexity of data management, and spanning the hybrid infrastructure used by most customers."

"And because these products are what we call infrastructure software, not applications, I believe AI will actually be a tailwind for us."

In recent years, Wall Street has grown skeptical of software stocks, primarily due to concerns that increasingly powerful AI technologies from companies like Anthropic and OpenAI could disrupt traditional software business models.

IBM's stock has fallen about 30% year-to-date, while the iShares Expanded Tech-Software Sector ETF (IGV-US) has declined 17%.

In February, Anthropic published an article about Claude Code, demonstrating the tool's ability to modernize COBOL code. Since COBOL is commonly used in mainframe systems, the news briefly caused IBM's stock to plunge 13%.

On Wednesday, after IBM reported earnings, Krishna told analysts that the company's current-generation z17 mainframe faced some challenges in the second quarter.

IBM CFO Jim Kavanaugh said that due to AI chip demand driving up memory prices, some customers chose to allocate funds to other data center equipment, such as servers and storage.

For every $1 IBM earns from mainframe infrastructure, it generates an additional $3 in software revenue. In the second quarter, IBM Z mainframe business revenue declined 42%, and transaction processing software revenue fell 9%, a stark contrast to the first quarter. In Q1, IBM Z revenue grew 48%, and transaction processing software revenue increased 2%.

During the second quarter, 45% of IBM's revenue came from software, its highest-margin business.

Krishna said Starbucks spends about $2 million annually on IBM software. He noted the coffee chain is phasing out Tririga lease management software. IBM acquired Tririga in 2011 and plans to end support for the software by 2027.

"That's a big part of that 2% I mentioned earlier, and I do think this kind of software is at risk," Krishna said. "By the way, they were using a 10-year-old software system."

Although IBM still maintains its 2026 forecast of increasing free cash flow by $1 billion, Kavanaugh said Wednesday that the company now expects software revenue to grow 6% to 8% this year. In January, Kavanaugh had expressed confidence that software revenue growth could reach double digits.

On Thursday, Krishna said hardware capacity on mainframes is increasing, which will also impact software. "Software growth typically lags behind hardware capacity. I think given another year, you'll see the software business catch up again."

Krishna said about 75% of delayed deals from the second quarter are expected to return to IBM by year-end.

Jefferies analysts said in a report to clients on Thursday, "We won't fully endorse the company's unchanged guidance until more delayed deals are reflected in reported results." However, Jefferies still recommends buying IBM stock.

IBM shares closed up 0.43% on Thursday at $206.65 per share.