Anyone who’s recently obtained a mortgage knows: This is the closest an American can come to experiencing a truly Kafkaesque bureaucracy, with its insistence on this certification, that stamp and yet one more permit.
The mortgage industry was swaddled in red tape and overwhelming paperwork even in the era of liar loans. It remains all that, only more so, in the housing bubble’s anxious aftermath, with originators and lenders more eager than ever to protect themselves from the excesses of the past and to satisfy newly vigilant regulators.
And yet, amid paperwork old and new, demand for mortgages is back, from home buyers and refinancing home owners alike. For the slimmed down lending industry, efficiently crossing all the t’s and dotting all the i’s to get the money lent out on time can spell the difference between a profit and lost business.
No wonder Ellie Mae (NasdaqGS: ELLI) was one of the hottest growth stories of 2012 and is poised to remain one this year. The small-cap software provider specializes in processing mortgage paperwork electronically, and offers the industry-leading cloud-based software-as-a-service platform.
Late Thursday, the company reported an 84-percent revenue jump for 2012 over the 2011 total. Profits easily surpassed Wall Street’s expectations as well, and Ellie Mae raised its sales and profit forecast well above the consensus among the already bullish analysts.
Driving the gains was the rapid recruitment of new cloud software users from competing platforms, helped by a doubling of Ellie’s sales force to meet the booming demand for its services.
That investment, and others made by the company last year, are expected to continue paying off over the next 12 months, with sales forecast to rise more than 25 percent. Moreover, management said it has a high degree of confidence about its projections.
Every time Ellie sells its software to a new lender or mortgage broker, it gets a foot in the door for ultimate sales of its cloud platform seat licenses and their expansion to additional origination functions and therefore people in that organization. And as more customers migrate online the percentage of stable, recurring revenue that Ellie can count on increases.
Those bullish forecasts Ellie issued last night factor in industry forecasts for a 17 percent drop in mortgage originations in 2013. And yet, anecdotally, the company sounds like it expects better. “I mean, I talk to customers and the purchase market is heating up in a lot of marketplaces, and every time I talk to a lender asking what they think 2013 is going to look like I am hearing as good if not better,” said President and Chief Operating Officer Jonathan Corr on yesterday’s conference call.
If anything, Ellie’s stock has been a victim of the company’s success. Its software now has 74,000 users, representing nearly 40 percent of the estimated potential market outside of the big banks using proprietary programs.
So the stock has been pressured of late (after quintupling last year) by concerns that growth has peaked, even as Ellie denies that its market is anywhere close to saturation.
The latest results more than bear out that optimism. But they have also ensured that, having burned through its tax-loss allowances, the company expects its tax rate to jump to 38% in 2013, from just 8 percent last year.
Still, this is a debt-free $570 million company with more than $100 million in cash in the bank and expectations of adding to that $23 million in free cash flow this year.
Ellie’s ambition is to expand into every stage of the mortgage process, from income verification and appraisals to the electronic packaging of mortgages for investors. It’s collaborating on pilot application approval programs with Wells Fargo (NYSE: WFC) and CitiMortgage. And the crop of new paperwork that mortgage lenders will face next year and beyond and beyond as a result of the Dodd-Frank financial reform legislation represents another opportunity.
On almost every metric, the stock is much cheaper than that of cloud-software giant Salesforce.com (NYSE: CRM), which is not growing as fast. And Ellie appears to be even more of a deal next to more comparable software-as-a-service plays such as Concur Technologies (NasdaqGS: CNQR) and Demandware (NasdaqGS: DWRE).
The housing recovery is still in its early stages. But Ellie already has it nailed.
Igor Greenwald is an investment analyst with The Energy Strategist.
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