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Autodesk Poised for Recovery

The building design software developer could do well if there is a pickup in software spending in the customer segments it serves.

By Battle Road Research, an equity research firm.

Autodesk's

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AutoCAD is the dominant software brand for architectural and building design, with over 9 million users of its flagship software.

Over the last decade, the San Rafael, Calif., company has virtually vanquished its competitors in this market, including privately held

Bentley Systems

.

Autodesk was founded in 1982 by John Walker, one of the authors of AutoCAD. Together, with a band of co-founders who helped commercialize the product, Autodesk became the leading PC-based application for architectural drawings. The company came public in 1985, offering 1.6 million shares at $11 per share.

Best known for its AutoCAD software package, Autodesk's applications stretch across building design. Civil engineering accounts for an estimated 55% of sales, mechanical product design as much as 25% of revenue, and video editing and animation for the entertainment and video game markets, the remaining 20% of sales.

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We have been concerned for some time about Autodesk's exposure to the architecture, engineering and construction (AEC) sectors, which have dramatically reined in their spending on automation and IT services in the last year.

However, company revenue appears to have stabilized at an annual clip of about $1.6 billion, down from the $2.3 billion that it recorded in calendar 2008. While we are not predicting a quick snapback to previous revenue levels, the company is poised to participate in a global recovery, should there be a pickup in software spending in the economically sensitive customer segments that it serves.

Most of Autodesk's revenue stems from PC-based software, and the company should be a beneficiary of the Microsoft Windows 7 upgrade cycle.

Microsoft's

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long-awaited new operating system, Windows 7, addresses many of the shortcomings of Microsoft's Vista, which was its first operating system debacle in many years.

Our view is that pent-up demand exists for Windows 7, because many businesses have delayed purchases of new computers and software, due to Vista's shortcomings, as well as the general economic malaise. The Windows upgrade cycle should drive an upgrade cycle for PC software developers, such as Autodesk, whose products run on Windows 7. Autodesk recently announced that nine of its products, including its mainstream AEC and mechanical desktop products, now support Windows 7.

Finally, a weak dollar will benefit Autodesk because over 60% of its sales come from outside of the U.S.

While it will be several quarters before Autodesk begins to show growth, revenue has stabilized, the company has exposure to the Windows 7 upgrade cycle and derives more than half of its revenue from overseas markets ---all of which bodes well for the future.

Battle Road Research (www.battleroad.com) an equity research firm, serves fund managers, analysts and financial advisers with an independent voice on technology, health care, solar power and education stocks. Battle Road analysts place an equal weight on industry and securities analysis in an effort to seek out stocks to buy and stocks to avoid. As an integral part of our research process, we tap into a network of industry sources who provide insight into the companies we cover. We present our conclusions in a straightforward buy, hold, sell format. As a matter of principle, we refrain from investment banking, company-paid reports, and personal investment in the stocks we research. Visit us on the Web at www.battleroad.com and www.battleroadblog.com.