Integration Risks for SAP Remain

SAP AG (SAP - Snapshot Report) reported in-line revenues and weaker-than-expected earnings in first quarter of 2008 due to the costs of the Business Objects [BOBJ] acquisition. The company continued its growth in Asia, the Americas and Europe. Additionally, the company proved it is still competitive with larger deals, winning BT Americas (BT - Analyst Report) and Pacific Gas & Electric Company (PCG - Analyst Report) during the first quarter. 

However, we are now concerned about the integration risks related to the acquisition of BOBJ, and the drag this could have on management’s ability to run its core business as it tries to integrate BOBJ into the SAP fold. We are also concerned with the company’s change of stance on acquisitions. Thus, we continue to rate shares of SAP a Hold.

We have increased our previously estimated revenue and earnings in US Dollar and Euro terms, while fixing an average exchange rate of 1=$1.52 for 2008 and 1=$1.50 2009. We continue to expect the company to continue to grow its revenues and earnings in excess of 10% on a constant currency basis in 2008 and for 2009, and the first quarter only strengthens our beliefs. We have fixed our target price at $55.75 based on the company selling at 21.36x our 2008 EPADS estimate of $2.61 over the next six months.

Udayan Mukherjee contributed to this report.

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