[DigitalToday reporter Jinju Hong (홍진주)] IBM dismissed market concerns that the spread of generative artificial intelligence could threaten its software business. The company stressed that only about 2 percent of its software can be replaced by AI and that most products instead serve as infrastructure supporting corporate AI adoption.

On July 23, CNBC reported that IBM Chief Executive Arvind Krishna said in an interview after the company’s second-quarter earnings release, "Most of IBM software is not applications being replaced by AI but infrastructure software that enables customers to use AI."

He explained that IBM’s software supports real-time use of data and reduces the cost and complexity of data management. He added that it provides the foundation to run AI across hybrid cloud environments. He stressed that "this business will instead get a tailwind in the AI era."

The comments came as market concerns grew after the second-quarter earnings release. As generative AI companies such as OpenAI and Anthropic grow rapidly, concerns have continued that the business models of traditional software companies could be shaken. IBM shares are down about 30 percent so far this year, and IGV, an exchange-traded fund for the software sector, is down about 17 percent over the same period.

A slowdown in the mainframe business was cited as a direct cause of the weak performance. Krishna said the current-generation mainframe system, the z17, fell short of expectations this quarter. IBM Chief Financial Officer Jim Kavanaugh said rising memory prices driven by growing demand for AI chips led customers to prioritise budgets for data centre equipment such as servers and storage.

The mainframe weakness also directly affected software results. IBM has a structure in which it generates about $3 in software revenue for every $1 in mainframe infrastructure revenue. This quarter, revenue from Z mainframes fell 42 percent from a year earlier, and revenue from transaction-processing software slipped 9 percent. That marked a sharp slowdown from the previous quarter’s 48 percent increase and 2 percent increase, respectively. The software business is a key profit source that accounts for about 45 percent of IBM’s total revenue.

Krishna cited the real estate management software Tririga as a case that could be most affected by AI. He said Starbucks spends about $2 million a year on the software, but IBM plans to end support in 2027. Krishna acknowledged that "a significant portion of the 2 percent mentioned as replaceable by AI is this kind of old software" and that "products more than 10 years old could be exposed to risk."

IBM maintained its forecast for free cash flow this year. The company reaffirmed its previous guidance that 2026 free cash flow will increase by about $1 billion from the prior year. It lowered its outlook for software revenue growth, however, from an earlier expectation of double-digit growth to 6 to 8 percent.

Krishna said he expects expanding mainframe capacity over time to lead to a recovery in software results. He said software running on mainframes generally sees revenue rise after hardware capacity is added, and forecast a recovery could emerge next year. He also said about 75 percent of contracts delayed this quarter are expected to be reflected in results again before year-end.

The market is also maintaining a cautious view. Investment bank Jefferies said it needs to confirm whether delayed contracts translate into actual revenue for the maintained earnings guidance to be realised. It maintained its investment rating on IBM at "buy."