IBM (IBM) CEO Arvind Krishna kicked off the company's earnings call by acknowledging the shock warning a week ago that upended what had been a successful tech turnaround story.

"Our AI strategy is the right one for IBM, and aligns to what we are known for: hybrid sovereignty and trust," Krishna said on the call. "With the portfolio, we have opportunities ahead. It comes down to execution. That is where we fell short in the second quarter."

IBM stock dipped 1% in premarket trading following the earnings release, as management faced questions on the quarter from Wall Street.

The quality of the numbers out after the close underscored that Big Blue appears to be in the AI disruption zone. Sales in IBM's infrastructure business dropped 7%, and consulting sales were unchanged. The software business grew sales by only 5%, slowing from an 11% growth rate in the first quarter.

  • Q2 net sales: +1% to $17.2 billion versus estimates for $17.2 billion.

  • Q2 diluted earnings per share: +5% to $2.93 versus estimates for $2.93.

  • 2026 outlook: IBM guided for full-year constant currency revenue growth in the range of 4% to 5%. Previously, it forecast full-year constant currency revenue growth of "more than" 5%.

Keep in mind that on July 14, IBM preannounced results that were well below consensus estimates for the second quarter, so expectations were already low heading into today's report card. IBM said it saw second quarter sales of $17.2 billion versus the analyst estimates of $17.85 billion at the time. Non-GAAP earnings are expected to be $2.93 compared to estimates of $3.02.

Since the warning, Yahoo Finance AlphaSpace data shows Wall Street has slashed its earnings per share estimates for IBM considerably for 2026 and 2027.

Yahoo Finance caught up with IBM's veteran CFO Jim Kavanaugh to discuss the results. Kavanaugh is also on the board of directors of telecom giant T-Mobile (TMUS).

On the earnings warning last week: "What's new is right now … companies, given the AI investments that they are going to make, which I think ultimately will get monetized and valued, today they're building out the infrastructure portfolio to support that future of the AI realization. What changed is the level of magnitude given the extreme price increases that the hardware providers and memory providers have went to the market with in the last 30 days.

"We did see the same thing last quarter inside IBM. Our inventory is up $600 million year over year because I went out consciously, made economically prudent buy-aheads for server storage parts, so I can protect against future price increases. That is happening in the marketplace. I don't think that has anything to do with AI eating software or anything else. This is just they're filling out the infrastructure layer as they move forward. It's as simplistic as that."