When the housing market performs well, mortgage activity surges, and that's good news for Ellie Mae (NYSE:ELLI). The provider of on-demand software for the residential mortgage industry has done well in attracting major industry players to become clients thanks to its efficiency-enhancing product offerings, and coming into Wednesday's third-quarter financial report, Ellie Mae shareholders saw no reason to rein in their ambitious expectations for the company's results. As we've seen in past quarters, Ellie Mae was able to surpass those expectations in its current report, and favorable guidance for the rest of the year showed that the company has more room to run. Let's look more closely at how Ellie Mae did in the third quarter and why investors seem more excited than ever about the company's prospects.
Ellie Mae can't stop climbing higher
Ellie Mae continued its long track record of taking high expectations and vaulting beyond them. Revenue climbed 61% to $68.9 million, beating the 46% growth rate that investors had wanted to see from the company. Adjusted net income rose at a nearly identical 62% rate to $13.9 million, and that produced adjusted earnings of $0.45 per share, which were a dime per share higher than the consensus forecast among investors.
Ellie Mae continues to attract more people to its groundbreaking software systems. Its Encompass system saw growth in active user counts of 30% year-over-year to 135,000, and the number of cloud-based subscribers rose at an even faster 47% rate. Six of every seven active users of Encompass are on the cloud version of the software product, and Ellie Mae managed to boost average revenue per user by 24% year-over-year to $520. Seat bookings also hit a new record because of strength in the mortgage industry.
CEO Jonathan Corr summed up the favorable quarter quite simply. "We added more encompass users," Corr said, "drove greater adoption of our services, and continued to see a sustained uptick in the purchase market." Corr also noted how Ellie Mae "help[s] lenders achieve loan quality, regulatory compliance, and operating efficiency" with its software products.
Can anything stop Ellie Mae?
The most interesting thing about Ellie Mae's success is that few people would have predicted strength in the mortgage market at this point in the business cycle. Many investors expected Wells Fargo (NYSE:WFC) and other major residential lenders to see falling mortgage volumes as interest rates started to climb. Yet anticipated higher rates haven't materialized, and hot real estate markets in many areas of the country have driven increased purchase activity, spurring higher mortgage volume and increasing demand for Ellie Mae's support services. Indeed, the rise in seat booking figures suggests that lenders like Wells Fargo are looking to boost their mortgage departments to meet rising demand, and Wells Fargo was an early pilot user for services from Ellie Mae in the past.
For its part, Ellie Mae has high hopes for the future. For the fourth quarter, Ellie Mae expects revenue of between $59.5 million and $60.5 million, which is substantially higher than the $58 million that investors are currently looking to see. Adjusted earnings of $0.18 to $0.20 per share would actually be slightly below the consensus forecast, reflecting what Ellie Mae sees as normal seasonality. Yet full-year guidance was even more favorable, with revenue of between $248.5 million and $249.5 million representing an $11 million rise from Ellie Mae's previous range, and adjusted earnings of $1.43 to $1.44 per share higher by $0.12 to $0.16 from earlier guidance.
Investors generally reacted favorably to Ellie Mae's news, sending the stock modestly higher in after-market trading following the announcement. In the end, Ellie Mae's growth will rely on continued strength in the housing and mortgage markets, and so anything that stands in the way of good conditions in those markets poses a threat to the mortgage-software specialist's future. For now, Ellie Mae is firing on all cylinders and seems prepared for whatever the market will throw at it.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short January 2016 $52 puts on Wells Fargo. The Motley Fool recommends Ellie Mae. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.