IBM CEO Arvind Krishna spent Thursday morning trying to reassure Wall Street that artificial intelligence poses a limited threat to the company's software business, telling analysts and investors that only a small slice of IBM's software could realistically be replaced by AI-built applications.
"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."
The remarks came a day after IBM reported disappointing second-quarter results. IBM shares are down about 30% this year. The broader iShares Expanded Tech-Software Sector ETF has dropped 17% over the same stretch. Wall Street has grown skeptical of legacy software companies over concerns that AI tools from companies like Anthropic and OpenAI will erode their business models.
IBM's mainframe business took a sharp hit in the quarter. Revenue from its Z mainframe line dropped 42%, a sudden reversal from the first quarter, when Z revenue grew 48%. Transaction processing software fell 9% in the quarter, compared to 2% growth in the prior quarter.
Finance chief Jim Kavanaugh attributed some of the mainframe weakness to customers choosing to spend money on other data center equipment, including servers and storage, as memory prices spiked because of AI chip requirements.
Krishna addressed the company's relationship with Starbucks as a concrete example of the 2% risk he described. He said Starbucks spends about $2 million per year on IBM software and is removing Tririga lease management software, which IBM acquired in 2011 and plans to stop supporting 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."
The company's software segment accounted for 45% of IBM's total revenue in the second quarter, where profit margins are the strongest. For every dollar IBM generates from mainframe infrastructure, it picks up $3 in software.
IBM previously expected double-digit software revenue growth for the full year. Kavanaugh walked that back on Wednesday, saying he now expects 6% to 8% growth in software revenue for 2026. The company kept its guidance for a $1 billion increase in free cash flow for the year.
Krishna told investors that about 75% of deals that slipped from the second quarter should return before year end. He also said mainframe hardware capacity is growing, which he expects will eventually pull software revenue back up.
"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.
