Market share continues to expand. Approximately 50% of all new U.S. mortgage loans are originated by the country's 20 largest banks. That part of the industry remains off limits to Ellie Mae's automation software. The giant banks have in-house programs that are integrated to an array of other software components. The remainder of the industry is served by regional and local banks, and independent mortgage brokers. Ellie Mae holds 50% or more of that segment. Half of the company's users still employ a hosted version of the software, which resides on their own computers. The other half uses a more modern cloud based edition which is easier to maintain, and which is priced on a success based model. Whenever a mortgage is written with Ellie Mae's software the company earns a piece of revenue generated, typically $100-$125 out of the $750-$1,000 total. That approach is proving to be very popular because it eliminates financial and technology risk, and it it is easier to update because Ellie Mae automatically adjusts the software for compliance and regulatory changes. The on premises version requires a programmer to install any changes.
The shift to success based pricing is driving results. Ellie Mae is converting its installed base of legacy users to the new model, which is more profitable for the company. It also is bringing in users who formerly employed competitive products. Average revenue per loan is rising, moreover, as customers rely on the software for more features. A year or two ago most mortgage bankers performed their own income verification or fraud detection work, and plugged the results into the software. Now Ellie Mae provides an integrated service. Performance is poised to keep improving sequentially as more users adopt the success based model and average order size continues to rise.
Reduced mortgage activity might slow down the growth rate. A big part of the mortgage boom has been generated by refinancing activity. That aspect might decline if interest rates stabilize or go up. There still are millions of homeowners with relatively high interest mortgages, though, people who to date have been unable to refinance due to low credit ratings. If housing price appraisals keep improving that segment of the market could be unlocked. Weak income growth throughout the economy in general might precipitate a rise in cash out mortgages, too. And merger activity among local banks is starting to increase. That could boost Ellie Mae's potential if the larger entities standardize on the company's industry leading technology.
Earnings have the potential to keep rising at a fast pace. We estimate income will advance 33% in 2013 and 30% next year. Product development could support higher revenue per loan ratios. Acquisitions of competitors offer further leverage. It might take 1-2 years to convert those user bases to Ellie Mae's technology, but the effect would be to expand the company's market share over the long haul.
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