Friday, March 30, 2012

Ellie Mae ( Nasdaq - ELLI ) -- Clear Sailing

Ellie Mae (ELLI $11.00) appears on track to report excellent on target Q1 results.  Industry mortgage volume topped forecasts in period, due to rising refinancing activity.  And the company's market share continued to widen, fueled by its "success based pricing" model.  Ellie Mae has been transitioning to that pricing format for the past two years, charging lenders for its software on a per-loan basis.  Some customers still employ the seat licensing model but a majority of revenue now is being generated by the variable approach.  Ellie Mae acquired its leading competitor in the technology space last year.  That integration has gone better than predicted.  Not only did Ellie Mae gain order flow, it also has been able to take advantage of a number of technology innovations.  No new competitors are on the horizon.  Plenty of fax-and-phone competition remains.  But Ellie Mae is steadily turning up the pressure, investing in additional software applications and communication networks.  It's services are likely to become increasingly cheaper, faster, and more accurate.

We're maintaining our (fully taxed) 2011 earnings estimate at $.25 a share.  Ellie Mae is ramping up employment and infrastructure spending to separate itself from the pack even further.  So even though mortgage volume might exceed industry forecasts this year all that spending probably will prevent margins from expanding much beyond our target.  Significant leverage is possible in 2013.  Average revenue per mortgage is likely to keep climbing.  The number of deals per customer is likely to improve, as well, as users essentially throw away their fax machines and go entirely electronic.  If the Government implements a mortgage re-write program further gains could be realized. 

The housing industry remains at extremely depressed levels.  Even if it never bounces back Ellie Mae promises to sustain above average growth by gaining market share, boosting revenue per transaction, and leveraging its fixed costs.  If housing activity returns to normal substantial further gains are possible.  A collaboration with Wells Fargo, which still is in early stage of development, could yield further impetus.

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