HP Inc. (HPQ) shares slipped in premarket trading Thursday after the company delivered a solid second-quarter earnings beat but warned that rising memory and storage costs will squeeze profit margins through the end of the year.

The PC and printing giant reported adjusted earnings of 86 cents per share, well ahead of the 71 cents analysts were expecting. Revenue climbed 9% year over year to $14.41 billion, topping the $14.04 billion consensus and marking HP's eighth straight quarter of revenue growth.

Gross margin expanded to 20.9%, helped by pricing actions and growth in higher-margin businesses, though higher commodity and component costs ate into some of those gains. Operating margin rose 20 basis points from a year ago to 7.5%.

HP's Personal Systems segment — the part of the business that sells PCs — was the star of the show, with revenue up 13%. The company credited strong demand from both commercial and consumer customers, rising adoption of AI PCs, and continued growth in advanced compute and workforce solutions.

AI PCs now make up 44% of shipments, up from more than 35% in the prior quarter. HP expects that number to climb to between 60% and 70% next fiscal year.

Print revenue was flat year over year, as pricing gains and favorable currency effects offset weaker hardware demand. Industrial graphics posted its 11th consecutive quarter of growth, and 3D printing delivered double-digit growth for the fifth straight quarter.

HP said it continues to expand its AI ecosystem through partnerships with more than 150 software companies. The company recently unveiled new AI PCs, workstations, printers, and industrial 3D printing systems at its HP Imagine event.

On the cash flow front, HP generated more than $900 million in operating cash flow and about $800 million in free cash flow during the quarter. It returned nearly $400 million to shareholders through dividends and share repurchases.

Outlook Narrows as Cost Pressures Mount

For the third quarter, HP expects adjusted earnings of 61 to 71 cents per share, compared with analyst estimates of 64 cents. The company also narrowed its full-year fiscal 2026 adjusted earnings outlook to $2.90 to $3.10 per share, versus its prior forecast of $2.90 to $3.20. Analysts currently expect $2.89 per share for the year.

Management said memory and storage costs increased sequentially during the quarter and warned that inflationary pressures are expected to continue through the second half of fiscal 2026, alongside higher energy-related input costs.

To offset rising expenses, HP said it is pursuing product redesigns, lower-cost component sourcing, targeted price increases, sourcing optimization, and broader productivity initiatives.

The company also said it expects the total addressable market for PC units to decline at a high-teens rate during the second half of the year, though it still anticipates revenue growth supported by pricing, a premium product mix, and higher-margin offerings.

HP remains on track to achieve about $1 billion in annualized cost savings by fiscal 2028 through AI-driven transformation efforts and operational efficiencies.

HPQ Price Action: HP shares were down 1.97% at $24.98 during premarket trading on Thursday.