Sunday, May 6, 2012

Ellie Mae ( Amex - ELLI ) -- Leverage Kicks In

Ellie Mae (ELLI $15.25) reported excellent better than expected Q1 results.  Earnings swung to a profit of $.14 a share (fully taxed) on a 97% sales increase ($20.9 million).  Pretax margins exploded to 23%.  Unit volume benefited from an expansion in overall mortgage activity combined with further market share expansion.  Average revenue per mortgage also expanded as more ancillary services were implemented.  Ellie Mae plans to hire aggressively over the next few quarters to enhance product development and marketing.  Those costs probably will cause margins to narrow somewhat in the short term.  U.S. mortgage activity is predicted to decline in upcoming quarters, which should create a drag on revenue growth despite further market share gains and average order size. 

Macro-economic headwinds may persist in 2013.  Approximately 60% of the mortgages produced in 2012 are likely to be refinancings.  If rates stop declining that segment may see less activity.  Origination volume could pick up the slack if the economy improves.  Government programs could yield additional leverage.  We estimate the overall U.S. mortgage market will decline next year, assuming further rate reductions don't occur.  Ellie Mae is likely to keep gaining market share, though.  Average order size is likely to keep rising, as well.  Altogether we think revenues could improve 25% next year to provide a 50% earnings gain.  The long term outlook remains positive.  If housing and mortgage activity return to normal levels revenues could keep widening at superior rates.  Fixed costs promise to increase far less rapidly than sales, moreover, creating the opportunity for even more rapid earnings growth.

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