IBM CEO Reassures Investors on AI Impact, Citing Minimal Software Disruption

Addressing AI Disruption Concerns

IBM CEO Arvind Krishna sought to reassure investors that artificial intelligence poses minimal threat to the company's software business. Krishna stated that only 2% of IBM's software could be replaced by AI-constructed applications. The majority of IBM's software is described as infrastructure software, designed to prepare for AI, unlock data, reduce management costs, and support hybrid infrastructures, which Krishna believes will be a "tailwind" for the company.

Wall Street's Skepticism on Software Stocks

Wall Street has grown skeptical of software stocks due to concerns that AI advancements from companies like Anthropic and OpenAI will disrupt existing business models. IBM shares have declined approximately 30% this year, and the iShares Expanded Tech-Software Sector Exchange-Traded Fund (IGV) has dropped 17%. This skepticism intensified for IBM after a February blog post by Anthropic highlighted its Claude Code tool's ability to modernize Cobol code, often found on mainframes.

Q2 Performance and Software Revenue

IBM's second-quarter results showed challenges, including a 42% drop in revenue from its Z mainframe business and a 9% decline in transaction processing software. This contrasts with the first quarter, where Z revenue grew 48% and transaction processing increased 2%. Software constitutes 45% of IBM's total revenue and is its most profitable segment. Finance chief Jim Kavanaugh noted that some customers shifted spending to other data center equipment due to spiking memory prices driven by AI chip requirements.

Specific Software Risks Identified

Krishna acknowledged that certain types of software, such as the Tririga lease management software used by Starbucks, are at risk. Starbucks, which spends about $2 million annually on IBM software, is discontinuing its use of Tririga, which IBM acquired in 2011 and plans to end support for in 2027. Krishna indicated that this type of older application contributes to the 2% of software he believes is vulnerable to disruption.

Financial Outlook and Software Growth

Despite the Q2 challenges, IBM maintained its guidance for a $1 billion increase in free cash flow by 2026. However, Kavanaugh adjusted expectations for software revenue growth, now forecasting 6% to 8% growth, down from previous projections.