IBM CEO Arvind Krishna is attempting to assuage Wall Street’s concerns following a disappointing second-quarter earnings report, asserting that only a small fraction of the company’s software portfolio is susceptible to replacement by artificial intelligence models. This strategic move aims to counter the prevailing market skepticism surrounding software stocks, which has been amplified by advancements in AI capabilities from companies like OpenAI and Anthropic.
“The overwhelming majority of our software is designed to prepare clients for AI adoption, focusing on real-time data unlocking, simplifying data management complexities, and enabling seamless integration across hybrid infrastructure environments, which is the prevalent setup for most of our clientele,” Krishna stated in a recent interview. He further elaborated that this “infrastructure software,” as opposed to direct end-user applications, is envisioned to act as a “tailwind” for IBM’s business.
The technology sector, particularly software, has faced significant headwinds over the past couple of years. Investors are increasingly wary of potential business model disruptions posed by increasingly sophisticated AI technologies. This sentiment is reflected in market performance, with IBM shares experiencing a roughly 30% decline year-to-date, and the iShares Expanded Tech-Software Sector Exchange-Traded Fund (IGV) seeing a 17% drop.
The threat of AI’s disruptive potential was starkly illustrated earlier this year when IBM’s stock plummeted 13% after Anthropic highlighted its Claude Code tool’s proficiency in modernizing legacy code, such as COBOL, a common language in mainframe systems. This event underscored the vulnerability of established software architectures to advanced AI solutions.
Adding to these pressures, Krishna acknowledged that IBM’s current-generation z17 mainframe encountered performance challenges during the second quarter. Chief Financial Officer Jim Kavanaugh attributed some of this to customer decisions to allocate capital towards other data center hardware, such as servers and storage, driven by surging memory prices intrinsically linked to AI chip demands.
Historically, IBM’s mainframe business operates on a lucrative model where for every dollar generated from hardware, it secures three dollars from software. However, the recent quarter saw a dramatic downturn, with revenue from the Z mainframe plunging 42% and transaction processing software experiencing a 9% decline. This marks a significant reversal from the first quarter, which had registered a robust 48% growth in Z revenue and a 2% increase in transaction processing. Despite this setback, software remains IBM’s most profitable segment, contributing 45% of its revenue in the June quarter.
Krishna also provided a concrete example of software vulnerability, citing Starbucks’ decision to discontinue its use of IBM’s Tririga lease management software, a platform acquired by IBM in 2011. This particular software is slated for end-of-support in 2027. “This is a significant component of that 2% I mentioned, and I do believe that software like this is subject to risk,” Krishna admitted, highlighting that the platform in question was a decade old.
Despite the software revenue forecast recalibration, IBM has maintained its guidance for a $1 billion increase in free cash flow for the full year 2026. However, Kavanaugh revised his software revenue growth projection for the year from a previously anticipated double-digit rate to a more conservative 6% to 8%.
Looking ahead, Krishna expressed optimism that the increasing mainframe hardware capacity would eventually translate into renewed software momentum. “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 remarked. He also indicated that a substantial portion of deals that were deferred from the second quarter are expected to close before the year concludes, with approximately 75% of those “slipped” activities anticipated to return to IBM.
Analysts at Jefferies, while recommending a buy rating on IBM stock, advised caution, stating, “We would avoid giving full credit for the maintained guide until a larger portion of the slipped activity is reflected in reported results.” This sentiment reflects the ongoing tightrope walk between AI disruption and the resilience of established enterprise software and hardware. The strategic imperative for IBM, and indeed many technology giants, lies in its ability to pivot its vast existing software ecosystem to become an indispensable enabler of the very AI revolution that many fear will supplant it. The coming quarters will be crucial in demonstrating whether IBM can successfully transition its robust infrastructure and software capabilities to meet the evolving demands of the AI era, thereby securing its long-term relevance and profitability.
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