Arvind Krishna said the 2% includes Tririga lease management software. IBM shares are down 30% this year as investors worry about AI disruption to software stocks.
IBM CEO Arvind Krishna told CNBC on Thursday that just 2% of the company's software could be replaced by applications built with AI models. He spoke a day after the company reported second-quarter results that disappointed Wall Street. IBM shares are down about 30% this year, while the iShares Expanded Tech-Software Sector ETF has fallen 17%.
"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 said. "And because it would be what you would call maybe infrastructure software, not applications, I believe it'll be a tailwind for us."
Investors have grown skeptical of software stocks over the past two years. The concern is that AI from Anthropic, OpenAI and others will disrupt existing business models. In February, IBM shares sank 13% after Anthropic published a blog post about Claude Code's ability to modernize Cobol code, a language often used on mainframes.
Krishna told analysts on the earnings call that the company's current-generation z17 mainframe ran into challenges in the quarter. Finance chief Jim Kavanaugh said some customers chose to spend on other data center equipment, such as servers and storage, because memory prices are spiking due to AI chip requirements.
For every dollar IBM generates from mainframe infrastructure, it picks up $3 in software. In the June quarter, the Z mainframe business saw revenue drop 42%. Transaction processing software declined 9%. That was a sharp reversal from the first quarter, when Z revenue grew 48% and transaction processing increased 2%. During the quarter, 45% of IBM's revenue came from software, the segment with the strongest profit margins.
Krishna said Starbucks spends about $2 million per year on IBM software. The coffee chain is removing 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," Krishna said. "By the way, what they had in place was a 10-year-old piece of software."
IBM stuck with its guidance for a $1 billion bump to free cash flow in 2026. Kavanaugh 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 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. They recommend buying the stock.
AlphaScala's proprietary model rates IBM at 42 out of 100, a Mixed label, indicating neutral sentiment.
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