HP (NYSE:HPQ) recently posted its second-quarter earnings, and the results didn't impress investors. The PC and printer maker's revenue fell 11% annually to $12.5 billion, missing estimates by $240 million. Its adjusted net income declined 10% to $0.7 billion, as its adjusted EPS dipped 4% to $0.51 per share -- which still beat estimates by $0.07.

Those steep declines indicated HP didn't profit from the surging demand in new PCs fueled by remote workers during the COVID-19 crisis. Let's see why HP missed out on this growth spurt, and what it means for the company's future.

A man uses a laptop while sitting on the floor.

Image source: Getty Images.

How bad was HP's second quarter?

Throughout 2019, HP's Personal Systems (PCs and workstations) business grew at a stable clip and offset the ongoing weakness of its Printing business, which was plagued by long hardware upgrade cycles and competition from generic ink and toner makers. That balancing act failed during the second quarter:

Revenue Growth (YOY)

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Personal Systems

2%

3%

4%

2%

(7%)

Printers

(2%)

(5%)

(6%)

(7%)

(19%)

Total

0%

0%

0%

(1%)

(11%)

YOY = Year-over-year. Source: HP quarterly reports.

HP's Personal Systems revenue fell 7% annually (6% in constant currency terms) due to supply chain disruptions that didn't end until early May. Both commercial and consumer revenues fell 7%, and total unit shipments fell 5%, with a 23% drop in desktop shipments overwhelming its 5% growth in notebook shipments.

A desktop PC with an illuminated case.

Image source: Getty Images.

On the bright side, the segment's operating margin expanded 230 basis points annually to 6.6% as lower commodity costs offset higher logistics expenses, and it reiterated the segment's long-term operating margin target of 3.5% to 5.5%, even as commodity and component prices (especially memory chips and CPUs) rise.

During the conference call, HP CEO Enrique Lores claimed "strong demand combined with a constant supply resulted in an elevated backlog which we expect to work down during Q3."

HP's Printing revenue tumbled 19% annually (18% in constant currency terms) as total hardware shipments plunged 23%, with a 25% drop in commercial hardware and a 22% decline in consumer hardware. Its higher-margin supplies revenue, which remains besieged by generic competitors, tumbled 15%.

The segment's operating margin contracted 320 basis points annually to 13.2%, due to lower revenue, supply chain disruptions, and higher logistics costs -- especially in the commercial print market.

During the call, CFO Steve Fieler remained "confident" in the segment achieving "long-term operating margin targets of 16% to 18%, once workers return to the office and demand improves" -- but also admitted that its higher-margin supplies revenue would likely "be more pressured than Q2".

What should investors expect in the third quarter?

HP expects its adjusted EPS to decline 22%-33% annually in the third quarter, but it didn't offer any revenue guidance. It also didn't provide any forecasts for the full year.

However, management's comments suggest its Personal Systems business will improve as supply chains come back online and it works through its backlog, though its Printing business should remain weak.

HP plans to continue spending over 100% of its free cash flow on dividends and buybacks in the near term, and 100% of its FCF over the long term. It also plans to continue the "enhanced" buyback plan it announced after rebuffing Xerox's (NYSE:XRX) takeover offer, but Fieler stated the "specifics will be determined once market conditions stabilize" -- suggesting it could dial back buybacks in the second half of the year.

Did HP miss its chance to sell more PCs?

HP is putting on a brave face during the crisis, but its main rival Lenovo (OTC:LNVG.Y) fared much better during the same period. Lenovo's PC and Smart Devices revenue rose 4% annually last quarter thanks to its focus on higher-growth segments like gaming, workstations, powerful visual design PCs, "thin and light" notebooks, and Chromebooks.

According to IDC, HP's market share contracted from 23% to 22% between the first quarters of 2019 and 2020. During the same period, Lenovo's share expanded from 22.7% to 24.1%. Therefore, HP's market share could continue declining even after it resolves its supply chain issues.

That's troubling, since former CEO Dion Weisler, who resigned last November, previously led the Personal Systems unit before the company's split with HPE (NYSE:HPE) in 2015. Wiesler was largely credited with improving HP's PC business with more elegant laptops and 2-in-1 devices, while his successor Enrique Lores previously led the struggling printing unit.

Without Wiesler, HP could struggle to keep pace with Lenovo and other rivals in the rapidly shifting notebook and desktop markets.

The key takeaways

HP clearly missed an opportunity to sell more PCs during the COVID-19 crisis, but the business might stabilize in the third quarter.

HP was once a stable mature tech stock, but its weaknesses are starting to overwhelm its strengths. Its PC and printer businesses both face intense headwinds, and the ongoing declines of its higher-margin printing supply revenue will continue throttling its earnings growth. Until HP resolves those issues, investors should stick with tech stocks that have more upside potential instead.