Thursday, June 21, 2012

Ellie Mae ( Amex - ELLI ) -- Market Share Gains Continue

Ellie Mae (ELLI $15.50) appears on track to produce excellent on target Q2 results.  Total mortgage volume in the United States has exceeded industry predictions so far in the June quarter.  And Ellie Mae is continuing to expand its share of the market.  Revenue per loan is expanding, as well.  Customers are adopting the company's "success based pricing" model in lieu of perpetual software licenses, laying the groundwork for recurring revenue gains in the future.  Margins jumped in the March period as fixed costs were leveraged by a big pick up in volume.  Further expansion is achievable over the long haul.  The company is spending heavily in Q2 and Q3 to expand its computer infrastructure, though.  It also is boosting sales and marketing efforts.  So further margin improvement is unlikely before the end of the year.  Still, a strong showing appears to be in the cards.  Our full year estimates are unchanged due to the weakening macroeconomic outlook.  Ellie Mae may have the horsepower to overcome those obstacles, however.  So a stronger performance is possible.

Above average growth is likely to be sustained in 2013.  Industry mortgage volume is predicted to decline as refinancings fall as a percentage of total activity.  Home purchases might not accelerate as much as some experts forecast, either.  Despite that, Ellie Mae could show gains of 25%-50% next year by expanding its market share, boosting revenue per transaction, and by adding new features via acquisition.  The company actively is pursuing companies with mobile, marketing, and risk management abilities.  A public offering is likely to be pursued before long to finance those deals and to support the overall expansion of the business.  That could dilute earnings somewhat in the short run.  But it should make Ellie Mae much more difficult to overcome by competitors.  In 2-3 years Ellie Mae could hold 75% of the non-major mortgage market.  (The 20 largest banks hold about 50% of the entire market, which is off limits to Ellie Mae.)  That's about twice the company's current market share.  If the housing market recovers within that time period these shares could trade at substantially higher levels than they are now.

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