HP: All eyes on EDS as profits rise

NEW YORK (CNNMoney.com) -- Hewlett-Packard Co. reported a 16% increase in its fiscal second-quarter earnings Tuesday, results that matched preliminary figures it reported a week ago.

The maker of printers and personal computers announced those results on the same day that it disclosed plans to buy technology services company Electronic Data Systems Corp. for $13.9 billion. The deal is expected to be completed in the second half of 2008 and could more than double sales in HP's service division.

HP reiterated Tuesday that it earned more than $2 billion, or 80 cents per share in the quarter, compared to 65 cents per share in the same period a year earlier. Excluding certain one-time items, the company said it earned 87 cents per share. Wall Street was expecting a profit of 85 cents per share when HP first released its figures last week.

HP said its overall revenue for the quarter grew 11% to $28.3 billion from $25.5 billion a year ago. Analysts had been expecting sales of $28.1 billion before HP's announcement last week.

Chief Executive Officer Mark Hurd said in a statement that HP was helped by strong sales from international markets, as revenue growth in Europe, Asia and the Middle East outpaced growth in the Americas.

"With 70% of revenue now coming from outside the U.S., we benefited from robust demand in emerging economies," Hurd said.

U.S. results were not all bad, and varied by business and geography, said Hurd in a conference call with analysts. "We try to be nimble enough to take advantage... It's just a very spotty market and one that we try to maintain caution around."

For the next quarter, HP (HPQ, Fortune 500) reaffirmed that it expects to see earnings between 82 cents and 83 cents per share on revenue between $27.3 billion and $27.4 billion. The company last week raised its year-end earnings prediction to between $3.54 and $3.58 per share.

Despite the healthy results and guidance, some investors are skeptical of the EDS (EDS, Fortune 500) deal. Shares of HP fell nearly 8% after news of the buyout first leaked out last Monday. The stock has recovered a bit since then, though.

Integrating EDS's operations will be the company's biggest challenge, according to Shebly Seyrafi, analyst with Caris & Company. EDS has a lower growth rate and maintains lower margins that HP, both of which pose short-term risks, he said.

According to Mark Hurd, the acquisition of EDS will help HP gain enterprise accounts.

"If anyone can pull it off, it's HP under Hurd," said Seyrafi.

The purchase of EDS is the biggest acquisition to date for Hurd, who took over the company in 2005. Since then, HP has built a solid lead over rival Dell Inc. (DELL, Fortune 500) in the global PC business and outsold Sun Microsystems Inc. (JAVA, Fortune 500) and IBM Corp. (IBM, Fortune 500) in the server market. The company's share price has more than doubled since he took the reins.