Many investors have feared that the mortgage market will eventually lead to another financial crisis, as unsustainably low interest rates could create problems when they finally give way to more normal conditions in the credit market. Yet for mortgage origination services provider Ellie Mae (NYSE:ELLI), there's never been a better time to capitalize on the favorable market it has found, and coming into Thursday afternoon's first-quarter financial report, shareholders hoped that Ellie Mae could continue its string of impressive results. Ellie Mae delivered solid gains for the quarter that surprised even the most optimistic of investors, pointing toward healthier growth that some now believe could last well into the future. Let's look more closely at Ellie Mae and how it managed to do so well in the first part of 2015.
Ellie Mae has another blowout quarter
It's hard to overstate just how well Ellie Mae did during the first quarter. Revenue jumped 68% to a record $54.2 million, surpassing even the ambitious 45% growth rate that those following the stock had expected. Earnings did even better, with adjusted net income more than doubling to $9.9 million and equating to earnings of $0.33 per share, topping expectations by about two-thirds.
A look at its secondary metrics shows the breadth of Ellie Mae's recent success. The company saw the number of clients actively using its Encompass system rise 25% to 119,000, with four-fifths of those users taking advantage of the cloud-based version of the program. Recurring revenue from the software-as-a-service version of Encompass rose 64% to $32.5 million, making up the majority of Ellie Mae's revenue for the quarter, and revenue per active user climbed to $474, up from $433 just last quarter and 38% higher than comparable figures a year ago.
CEO Jonathan Corr explained how factors conspired to bring great results for Ellie Mae. "Our clients closed more loans than expected due to origination volumes that were above initial industry forecasts," Corr explained, "but our customers also outpaced the mortgage industry as a whole." Corr also pointed to Ellie Mae's growing user base and increased use across its platform offerings in helping to boost revenue.
Are things looking up for Ellie Mae?
Ellie Mae's second-quarter guidance also impressed shareholders. The company now expects to bring in $59 to $60 million in revenue during the current quarter, producing adjusted earnings of $0.28 to $0.30 per share. Both figures are well above what investors had expected, and even better, Ellie Mae boosted its full-year revenue guidance by $20 million to a range between $223 million to $226 million, and earnings per share of $1.09 to $1.13 on an adjusted basis is almost a quarter per share more than Ellie Mae had previously believed it would make.
Yet today's share-price action shows how traders aren't certain about Ellie Mae's immediate prospects. In advance of the earnings announcement, Ellie Mae fell almost 5%, as if investors were looking for excuses to get out of the stock before getting bad news. Yet after the favorable results came out, shares soared about 10% in the first couple hours of after-hours trading, sending the stock to what would be a new all-time record high if it holds up tomorrow.
Going forward, Ellie Mae will still find itself somewhat vulnerable to the mortgage market, and if activity in housing starts to slow down, then Ellie Mae's clients might decide to pull back on their purchases of the company's services. Nevertheless, mortgage lending is never going to go away completely, and if Ellie Mae can demonstrate the value of its software and related services, most of its clients are likely to see related costs as part of the expense of doing business. That could make Ellie Mae a lot more recession-resistant than most investors expect, and in turn, the big gains that shareholders have seen could prove more sustainable than pessimistic investors fear.