Ellie Mae (NYSE:ELLI), a provider of cloud-based software to mortgage lenders, reported its second-quarter results on Thursday, July 26. Market share gains allowed the company to post revenue growth of 20% even as rising interest rates took their toll on origination volumes.

Let's take a more granular look at Ellie Mae's results to see what's driving the double-digit gains.

A person holding a tablet and pressing a digital image of a house projected above it.

Image source: Getty Images.

Ellie Mae second quarter: The raw numbers

 Metric Q2 2018 Q2 2017 Change
Revenue $125 million $104.1 million


Non-GAAP net income $19.1 million $18.2 million 5%
Non-GAAP EPS $0.54 $0.51 5.8%

Data source: Ellie Mae.

What happened with Ellie Mae this quarter?

  • Revenue growth was driven by a 6% increase in loan volume on the Ellie Mae platform and a 13% increase in revenue per loan. The uptick in revenue per loan is partially attributable to last year's acquisition of Velocify. Total revenue of $125 million came in above the high end of management's guidance range. Overall industry volumes declined by 3% during the same period. 
  • Encompass users totaled 193,000 at quarter end. This figure was up 9% versus the prior year.
  • The average Encompass user closed 1.23 loans during the period. This was down from 1.3 in the second quarter of last year.
  • Non-GAAP gross margin ticked up 30 basis points sequentially to 64.8% on the higher volumes.
  • Spending levels remain elevated as the company continues to pour money into research and development and expanding its commercial capabilities.
  • Even with the higher spending levels, non-GAAP EPS came in at $0.54. That was far higher than management had previously estimated.

What management had to say

CEO Jonathan Corr shared his usual praise for why Ellie Mae continues to succeed:

The value proposition of Encompass remains strong as the industry seeks a digital mortgage platform that improves and streamlines the complex origination process. We have made continued progress in the rollout of our Encompass Lending Platform, announcing the general availability of several Encompass Connect solutions. This includes the general availability of Encompass Consumer Connect, which is designed to help lenders better compete in today's highly competitive purchase-centric market by enabling a seamless end-to-end digital experience for the borrower.

Looking forward

Management said that overall origination volumes are expected to remain under pressure throughout the remainder of the year. Current data suggests that higher interest rates will lead to a volume decline of 7% for the full year, driven primarily by reduced refinancing activity.

In spite of the choppy operating environment, management projects that revenue growth will continue to be robust. However, the company also expects that spending rates will remain elevated and will continue to cause profitability growth to lag revenue: 

Metric Q3 2018 Guidance Q3 2017 Actual Implied Growth at the Midpoint
Revenue $127 million to $129 million $107 million 20%
Non-GAAP net income $18.5 million to $20.5 million $18.8 million 4%
Non-GAAP EPS $0.52 to $0.57 $0.53 4%

Data source: Ellie Mae.

In spite of the headwinds, management took the opportunity to move up its profit guidance for the full year:

Metric Updated 2018 Guidance Old 2018 Guidance
Revenue $495 million to $505 million $495 million to $505 million
Non-GAAP net income $64.5 million to $69.5 million $61.0 million to $65.0 million
Non-GAAP EPS $1.79 to $1.91 $1.68 to $1.78

Data source: Ellie Mae.

Corr ended his prepared remarks on the call with investors by saying, "In summary, we feel great about our long-term growth. The opportunities, as we look ahead, we look to drive toward our goal of automating everything automatable in the mortgage origination process."

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