*What Do Ellie Mae’s Earnings Really Mean?*
**By Tony Garritano**
***The headlines that you’ll be reading all morning about Ellie Mae’s first quarter results are that the LOS company’s revenue went up 48% year over year to $30.9 million; its adjusted EBITDA went up 87% year over year to $10.0 million; it got $7.9 million of free cash flow generated; and it hit a record 80,710 active Encompass360 users as of March 31, 2013. All of that is certainly great news for Ellie Mae, but what should it mean to you? Here’s my take:
****Well, before I tell you what I think, Sig Anderman, CEO of Ellie Mae, said in the earnings report, “We had a great start to the year with strong financial and operating performance in the first quarter. Through solid execution we delivered robust growth in both revenue and profits while generating significant free cash flow. We sold a record number of SaaS Encompass360 seats, with continued strong progress in adding new customers, increasing users from existing customers, and upgrading existing customers to our SaaS platform. We also had a record increase in the number of new active SaaS users during the quarter, which we believe will provide a solid foundation for continued growth in 2013 and beyond.”
****By the numbers, total revenue for the first quarter of 2013 increased 48% to $30.9 million, compared to $20.9 million in the first quarter of 2012. Net income for the first quarter of 2013 was $3.9 million, or $0.14 per diluted share, compared to net income of $3.6 million, or $0.16 per diluted share, in the first quarter of 2012.
****“Setting a new user growth record this quarter on the heels of record growth last year speaks to the tremendous appeal of our on-demand platform,” continued Mr. Anderman. “With the heightened concerns lenders have about quality, regulatory compliance and efficiency; our innovative on-demand technology solutions provide us the opportunity for continued growth well into the future.”
****On a non-GAAP basis, adjusted net income for the first quarter of 2013 was $7.6 million, or $0.27 per diluted share, compared to $4.6 million, or $0.20 per diluted share, in the first quarter of 2012. Adjusted EBITDA for the first quarter of 2013 was $10.0 million, compared to $5.4 million for the first quarter of 2012.
****As a result of these numbers Anderman is very excited about the growth potential for Ellie Mae this year. “With the business momentum we experienced in the first quarter, we are pleased to raise our full year revenue guidance, even in the face of current expectations for a decline in 2013 mortgage origination volumes. We are maintaining our bottom line guidance for the full year, enabling us to incrementally increase our investment in growth initiatives and further enhance our compliance capabilities with a goal of extending our leadership position,” Mr. Anderman concluded.
****The April 2013 composite forecast of Fannie Mae, Freddie Mac and the Mortgage Bankers Association for 2013 mortgage origination volume is approximately $1.6 trillion, which represents a 14% decrease from estimated mortgage volume in 2012.
****How does this impact Ellie Mae’s future? For the second quarter of 2013, revenue is expected to be in the range of $33.5 million to $34.0 million. Net income is expected to be in the range of $4.0 million to $4.4 million, or $0.14 to $0.16 per diluted share. Adjusted net income is expected to be in the range of $7.7 million to $8.2 million, or $0.27 to $0.29 per diluted share. Adjusted EBITDA is expected to be in the range of $11.4 million to $12.5 million.
****For the full fiscal year 2013, revenue is expected to be in the range of $130.0 million to $131.5 million, up from the previously provided range of $127.5 million to $129.0 million. Net income is expected to continue to be in the range of $15.6 million to $16.2 million, or $0.55 to $0.57 per diluted share. Adjusted net income is expected to continue to be in the range of $30.2 million to $31.0 million, or $1.06 to $1.09 per diluted share. Adjusted EBITDA is expected to continue to be in the range of $44.2 million to $45.4 million.
****Okay, I’ve kept you waiting long enough and I’m sure you’ve seen these figures before elsewhere. Now I’m going to put on my industry pundit hat and tell you what this means to me and what I think it should mean to you. Ellie Mae is doing well. I hear that lenders are really concerned about the new CFPB rules that will come down in January to the point that many are giving their existing LOS a second look. Even if they’re happy with their LOS, they’re checking out the competition to see if they truly have the best system. On the LOS side, they realize that lenders are looking and they’re all trying to maintain their existing clients and pick away at their competitors’ market share. Competition is fierce in this space and will continue to be fierce throughout the rest of this year in particular.
****Come January 2014 lenders are going to stick with the LOS that they have, which in some cases will be their existing LOS and in other cases will be a new LOS. They’re going to want to see how their LOS responds to the January changes. After a few weeks some lenders will be dissatisfied and a new round of LOS conversions will start toward the end of the first quarter/early second quarter of next year.
****What these earnings tell me is that Ellie Mae will survive. There are going to be LOS winners that survive and thrive and losers that shrink and shrink until they go out of business or are sold. Financial stability matters and Ellie Mae is certainly financially stable and financial stability matters to lenders as they wonder if their LOS will be a winner or a loser overall. This time next year I will still be writing about Ellie Mae and they will still be doing well. Are they going to be among the LOS winners that adapts well to new industry rules and gobbles up market share as result? Without having seen all the LOS companies in the space I can’t predict that, but I can tell you with almost 100% certainty that they will survive regardless.
****The bottom line is there’s always going to be room for several LOS players. Lenders are never really satisfied with their LOS anyway. They’re always looking for the better system. So, will Ellie Mae be the last LOS left standing? Certainly not, but I think it’s a good bet that they will be one of the major LOS players for some years to come.