Given that Ellie Mae’s (ELLI) results exceeded analyst’s expectations in virtually every way, it’s understandable why Wall Street bid ELLI 18.5% higher after the Feb. 11 earnings release. New customer seats booked for the fourth quarter were a whopping 8,700 compared with 5,500 from a year ago. This is thanks in part to a shift in mortgage volume away from the mega-lenders toward the large and midsized lenders. In total Ellie Mae grew its share 25% to 136,000 total users at the end of the year.
Ellie Mae’s Move to SaaS
During the quarter contracted revenue represented 64% of total revenue and revenue per active Encompass user grew 10% over the same quarter a year ago to $475. Active Software-as-a-Service (SaaS) Encompass users grew 43% year-over-year to 121,000 and the total number of SaaS seats under contract grew 31% year-over-year to 166,000.
Gross margin fell from 68% to 64% as costs grew for the quarter. RESPA-TILA became effective in the fourth quarter and costs in building out the platform and workforce to better serve clients will continue in 2016. Management expects total headcount to grow from 857 at the end of 2015 to 1,000 by the end of 2016.
Ellie Mae’s transition to being a pure SaaS provider will be completed in the front half of 2016 and as the business sunsets its legacy licensing products management will focus on the following quarterly metrics starting in 2016:
- Total contracted revenue;
- Percent contracted revenue;
- SaaS revenues;
- Revenue per active Encompass user;
- Contracted SaaS users; and
- Total seat bookings.
Composite industry data forecasts an 11% decline in 2016 origination volumes for the year. With this in mind management’s guidance for first quarter revenue is in a range of $67.5-$68.5 million with non-GAAP EPS in a range of $0.29-$0.31. Full year revenue is expected in a range of $317-$321 million (representing 25.5% growth at the midpoint) with non-GAAP EPS in a range of $1.79-$1.86.
Management noted that they expect a continued move away from refinancing and toward purchase mortgage volume which makes perfect sense. How this plays out on the actual business though is another question entirely, though they don’t seem overly concerned at this point as CEO Jonathan Corr noted in the call:
“Although economists forecast a slow rise in interest rates, origination volume projections also show a material increase in purchase volumes for 2016 and 2017. We expect that modest interest rate movements will have little to no effect on the overall demand for home purchases. Likewise, we expect such rate changes to have minimal impact on our financial results and our seat bookings.”
Looking Even Further Ahead
One of the questions I continue to entertain is the value Ellie Mae offers to the mega-lenders and how that could play out down the road. Could there be an outright acquisition? Perhaps, though that could give an already powerful mega-lender an advantage that regulators might not agree with.
The big banks typically maintain their own internal lending solutions however keeping up with the ever-morphing compliance landscape is becoming more and more challenging. Could this result in perhaps bigger, strategic deals in the future based on some sort of compliance product? CEO Jonathan Corr seems to think the business is already headed in that direction and this could certainly be another catalyst to drive shares higher in the long run.
ELLI: The Bottom Line
Ellie Mae is a very impressive business. An all-in-one solution with high regulatory (and technical) barriers to entry along with high switching costs that grow over time yields a business that should be able to squeeze out a little pricing power down the line if management continues to execute. While I still have some questions as to how things will look with the shift towards a purchase dominated environment, the strength of this business and its competitive position leave me feeling great about its future.
Jason Moser is a senior analyst for The Motley Fool’s flagship real-money portfolio service, Million Dollar Portfolio. He’s also a core member of the daily MarketFoolery podcast and the weekly show, Motley Fool Money. At the time of this writing, both Jason and the Million Dollar Portfolio were long ELLI stock. He’s been known to fire off a tweet or ten, and his Twitter handle @TMFJMo is where the magic happens.
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