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Apr 21, 2017

S3 Research: Short Sellers Don’t Like Autodesk’s New Subscription Sales Model

Short interest in the worldwide Application Software sector is $20.3 billion, $14.1 billion in the U.S., and short interest increased $301 million over the last 30 days even though a proxy for the sector, the PowerShares Dynamic Software ETF (PSJ US), is up 3.0% over the last month and up 9.9% year-to-date. Autodesk Inc. (ADSK US) had the largest monthly increase in short interest with an increase of $253 million. The only other stocks whose short interest rose over $100 million in the last month were recently IPO’ed Snap Inc. (SNAP US), with an increase of $174 million bringing its short interest to $739 million, and Micro Focus Intl (MCRO LN), whose stock is up over 13% on the year.

The application software sector was not kind to short sellers in 2017 with the top ten most profitable year-to-date shorts earning a $174 million profit and the top ten least profitable year-to-date shorts losing $1.5 billion this year.

The $18.6 billion engineering and application software market has been dominated by SAP SE, Dassault Systemes, Ansys, PTC, Siemans, Synopsis, Adobe and Autodesk, and growth is coming from non-traditional venues such as autonomous driving, 3D printing and the IoT (internet of things).

With this change of product direction comes a change in marketing and sales direction for Autodesk. In an attempt to create more reliable and smoother revenue streams, Autodesk is looking to switch from a “perpetual license” sales model to a subscription-based model a la Adobe Systems. Users, especially smaller non-institutional users, are up in arms with the switch having already paid for a perpetual license that Autodesk is looking to eliminate.

In an effort to transfer more users to their new payment platform, Autodesk is offering discounts of up to 60% on subscription rates and is increasing the price of the maintenance program associated with its existing perpetual licenses. Even though many users are transitioning to the new model, there are a percentage of users switching to competitors’ products that are still license based. In an effort to smooth out its revenue stream and create long term cash flow, Autodesk may in fact be losing business to its competitors.

Autodesk short interest is at a historical high of $862 million - up $72 million, or 9%, for the year as short sellers keep selling into ADSK’s 19.5% 2017 rally. Short sellers have had high conviction in their short ADSK positions even as they were down $114 million, or 20.5%, in 2016 on an average short position of $555 million. They continue to believe in their thesis as they have lost another $143 million, or 18.8%, in 2017 on an average short position of $756 million.

As ADSK shorts incurred over $256 million of mark to market losses, down 42.6% since 2016, they have increased their positions by $368 million, or 75%. It looks like they are sure that ADSK’s customer retention and pricing power coupled with increased competition will result in negative growth in 2017, an overall drop in revenues and negative EPS until 2020.

Want deeper insight into the above analysis? Contact: 
Head of Research, S3 Partners
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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