IBM CEO Arvind Krishna stated on Thursday that only 2% of the company's software could be replaced by AI applications, following disappointing second-quarter results. Krishna made the remarks to CNBC's 'Squawk on the Street' as IBM shares have declined 30% this year amid Wall Street concerns that AI will disrupt software business models. The reassurance comes as the broader software sector faces pressure, with the iShares Expanded Tech-Software Sector ETF down 17% and technology from Anthropic and OpenAI advancing rapidly.
Krishna States 2% Software Replacement Risk from AI
Krishna told CNBC that the remaining 98% of IBM's software helps organizations prepare for AI by unlocking data in real time, reducing management costs and complexity, and operating across hybrid infrastructure. He characterized this infrastructure software as a tailwind for the company rather than a threat.
In February, IBM shares sank 13% after Anthropic issued a blog post on its Claude Code tool's ability to modernize Cobol code, which is commonly found on mainframes.
IBM Mainframe Revenue Dropped 42% in Second Quarter
Krishna told analysts on Wednesday that IBM's current-generation z17 mainframe encountered challenges in the quarter. Finance chief Jim Kavanaugh stated that 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.
The Z mainframe business saw revenue drop 42% in the quarter, while transaction processing software declined 9%. This marked 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. For every dollar in revenue IBM generates from mainframe infrastructure, it picks up $3 in software.
Starbucks Removes IBM Tririga Lease Management Software
Krishna said Starbucks spends about $2 million per year on IBM software. The coffee maker is taking out Tririga lease management software, which IBM bought in 2011 and plans to end support for in 2027.
Krishna stated that Tririga represents a significant component of the 2% of software subject to replacement risk. He noted that what Starbucks had in place was a 10-year-old piece of software.
IBM Revises Software Revenue Growth Guidance to 6-8%
While IBM maintained its guidance for a $1 billion bump to free cash flow in 2026, Kavanaugh said on Wednesday that he now expects 6% to 8% growth in software revenue for the year. In January, he had stated confidence that the growth rate would be in the double digits.
Krishna said on Thursday that mainframe hardware capacity is growing, with implications for software. He stated that software on mainframes tends to lag hardware capacity, and if given another year, the software will catch back up.
Krishna said about 75% of deals that slipped from the second quarter should come back to IBM before year end. Analysts at Jefferies wrote in a Thursday note that they would avoid giving full credit for the maintained guidance until a larger portion of the slipped activity is reflected in reported results. They recommend buying the stock.
FAQ
What percentage of IBM's software does Krishna say could be replaced by AI?
IBM CEO Arvind Krishna stated that only 2% of the company's software could be replaced with applications constructed by AI models. The remaining software helps organizations prepare for AI by unlocking data, reducing management complexity, and operating across hybrid infrastructure.
How much did IBM's mainframe revenue decline in the second quarter?
IBM's Z mainframe business saw revenue drop 42% in the second quarter. Transaction processing software declined 9% in the same period. This contrasted with the first quarter, when Z revenue grew 48% and transaction processing increased 2%.
