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Ellie Mae Defies the Mortgage Industry's Slowdown

By Dan Caplinger – Apr 26, 2018 at 6:13PM

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Find out how the mortgage software company is surviving higher interest rates.

Investors are scared about the state of the mortgage market, and that's created consternation about mortgage software platform provider Ellie Mae (ELLI) and its ability to keep producing the huge growth that it has seen in recent years. Concerns about rising interest rates have been around for a year now, but only recently have rate increases from the Federal Reserve on the short-term end of the yield curve actually started to have a substantial upward impact on longer-term fixed mortgage rates.

Coming into Thursday's first-quarter financial report, Ellie Mae investors were ready to see the downward impact of those concerns appear in its financial results. In that light, the company's performance was exemplary, as results were much stronger than expected. That showed Ellie Mae's ability to keep building on its strong foundation of success even in the face of tough conditions that its customer base is dealing with.

Light blue cloud with circles and squares showing Encompass lending platform components.

Image source: Ellie Mae.

Ellie Mae gets a good start to 2018

Ellie Mae's first-quarter results reflected the challenges that its mortgage-lender clients are addressing. Revenue of $117.9 million was up 27% compared to the first quarter of 2017, which dramatically exceeded the 17% growth rate that most of those following the stock had thought they would see. Adjusted net income climbed by more than a third to $12 million, and the resulting adjusted earnings of $0.34 per share was much better than investors had expected.

From a fundamental perspective, Ellie Mae's performance was encouraging. The number of active users on the company's Encompass platform climbed by more than 19,000 to 190,650. Ellie Mae said that it closed 553,000 loans on Encompass during the seasonally slow period, up 38,000 from the year-ago quarter, and revenue per closed loan climbed by $32 to $213 per loan.

Ellie Mae continued to let cost increases outpace its revenue, however. Overhead expenses played a particularly clear role in adding to overall costs, rising by more than half from year-ago levels. Research and development expenses also picked up at a nearly 30% pace. Again, tax benefits were instrumental in helping the company post a GAAP profit for the quarter.

CEO Jonathan Corr liked what he saw. "Ellie Mae is off to a strong start," Corr said, "with first quarter financial results exceeding expectations and the number of closed loans on our platform increasing 7% year over year despite lower industry volumes." The CEO noted that the rising popularity of the Encompass platform has been critical to Ellie Mae's upward trajectory.

What's ahead for Ellie Mae?

Corr was especially encouraged by how a recent user conference went. In March, Ellie Mae brought in more than 3,000 attendees to unveil its latest upgrades, showing the lending platform provider's goal of a completely digital experience that starts when the customer first starts exploring mortgage options and ends with post-closing documentation to the borrower and delivery of mortgage assets to investors. "Data, business analytics, and machine learning will be key drivers to the True Digital Mortgage," the CEO said, and end-to-end automation of the entire mortgage process could have huge value for clients and also improve borrowers' experiences as well.

Yet Ellie Mae's guidance for the second quarter fell short of investor expectations. The mortgage software specialist sees revenue coming in between $122 million and $124 million, which is slightly less than the consensus forecast for $125 million. Those following the stock had also hoped to see predictions of $0.51 per share for earnings for the second quarter, but Ellie Mae's guidance came in lower, between $0.38 and $0.43 per share.

Even with that guidance, shareholders seemed generally pleased with the report, and the stock was higher by about 1% in after-hours trading following the announcement. Given its ability to succeed even under increasing pressure, Ellie Mae looks like it's on a good path toward defying the mortgage slowdown and making ever-improving relationships with lending institutions in the business.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ellie Mae. The Motley Fool has a disclosure policy.

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