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Autodesk (NASDAQ:ADSK): Cautious call from Morgan Stanley

 August 15, 2007 10:36 AM

- Morgan Stanley is out with a cautious call on Autodesk (NASDAQ:ADSK) saying they are picking up softness in the channel overall that may weigh on ADSK results expected this Thursday. With a few positive checks to help keep things from looking too stormy, feedback indicating sales quotas a stretch and a few resellers frustrated with shrinking incentives, the firm believes that the building front may catch up with the company - if not this quarter, perhaps the second half of the year for which a healthy ramp (+15% Y/Y) is expected. The stock currently trades in-line with its peers using multiples from a conservative model, but any softness either in actual results or guidance could weigh on the shares especially given ADSK's record of better growth and expectations for the same.

Other vendors in the segment experienced slowness this quarter (see PMTC and Dassault's SolidWorks segment) and MSCO believes ADSK may also be seeing pressure based on channel feedback hence our focus on sales inertia.

Last Q's results indicated momentum in certain areas but full-year guidance left us wondering if it was on the optimistic side against the backdrop of some potentially weakening core metrics. ADSK has been able to leverage subscriptions and 3D to drive overall revenue growth but declining new seat adds, slowing subscription penetration and sluggish deferred revenue growth may point to signs of a storm ahead.

Notablecalls: I think this call is actionable from a trading perspective. Recall that PMTC reported solid Q1 results and provided strong guidance only to disappoint investors couple of months later. While admittedly PMTC's negative pre-announcement was due to weak execution, one can't help to wonder if it was the only reason. Maybe the CAD market is indeed slowing? Like ADSK, PMTC's top line growth had been decelerating over the last year.

Also, recents checks done by other firms show that some large Autodesk resellers have indicated that the loss of volume discounts on AutoCAD has hurt their business. Some mentioned that they tried to put more sales effort behind 3D products, but that the market for 3D is simply going to develop and grow at its own pace. In other words, changing incentive compensation and changed sales force behavior could not alter the pace of 3D adoption beyond its own chosen speed.

I know there's a fair chance ADSK will prove the doubters wrong but given the nervous shoot-first-ask-questions-later type of market we are in I think ADSK stock will take a hit today.


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