IBM CEO Arvind Krishna told investors that only 2% of the company's software is at risk of AI displacement, even as a 42% drop in mainframe revenue dragged down transaction processing software and prompted IBM to cut its full-year software growth forecast.
IBM CEO Arvind Krishna moved to calm investor concerns on Thursday, arguing that artificial intelligence poses a limited threat to the company's software portfolio — even as IBM reported a sharp decline in its mainframe business and cut its full-year software revenue growth forecast.
"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." "And because it would be what you would call maybe infrastructure software, not applications, I believe it'll be a tail wind for us."
Krishna's reassurances came after IBM posted disappointing second-quarter results, with customers shifting spending away from mainframe computers toward servers and storage as memory prices climbed amid AI chip requirements. Z mainframe revenue fell 42% in the quarter — a stark reversal from the first quarter, when the same segment grew 48%.
The mainframe weakness pulled down related software. Transaction processing software declined 9% in the period, compared with 2% growth in the first quarter. For every dollar IBM earns from mainframe infrastructure, it collects roughly $3 in software revenue, making the segment's health directly consequential for the company's most profitable business line.
Software accounted for 45% of IBM's total revenue during the June quarter, where profit margins are the strongest.
IBM finance chief Jim Kavanaugh said Wednesday that the company now expects software revenue to grow 6% to 8% for the full year — a significant step down from January, when he said he was confident the growth rate would be in the double digits. IBM maintained its guidance for a $1 billion increase in free cash flow for 2026.
Krishna offered a specific example of the displacement risk he acknowledged: Starbucks, which he said spends about $2 million per year on IBM software, is removing Tririga lease management software — a product IBM acquired in 2011 and plans to end support for 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.
The broader backdrop for IBM is challenging. Shares are down approximately 30% this year, and the iShares Expanded Tech-Software Sector ETF has declined 17% over the same stretch, reflecting persistent Wall Street skepticism that AI from companies such as Anthropic and OpenAI will erode established software vendors' business models. In February, IBM shares sank 13% in a single session after Anthropic published a post describing its Claude Code tool's ability to modernize Cobol — the programming language commonly found on mainframes.
Krishna told analysts Wednesday that about 75% of deals that slipped from the second quarter are expected to return before year end. Analysts at Jefferies, who recommend buying the stock, wrote in a Thursday note that they "would avoid giving full credit for the maintained guide until a larger portion of the slipped activity is reflected in reported results."
On the hardware side, Krishna said mainframe capacity is growing and expects software revenue to follow with a lag. "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.
How quickly that recovery materializes — and whether AI-driven code modernization tools accelerate customer departures from mainframe ecosystems — will shape IBM's ability to restore the double-digit software growth rates it projected at the start of the year.
Jay Goldberg is a staff writer at TechEchelon covering technology, markets, and policy. He files the breaking news and deal coverage that move the publication's core desks.
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