It’s halfway through the year and Ellie Mae (ELLI) is still living up to the positive forecast that it was given.
After recent meetings with Ellie Mae’s Chief Financial Officer Ed Luce and investors, FBR Capital Markets & Co. said in a recent industry note that it walked away more confident in the company’s ability to deliver 40%+ revenue growth in 2015.
In its most recent first-quarter earnings, the company reported revenue of $54.2 million, up 68% from $32.2 million in same time period last year.
Ellie Mae’s strong performance was predicted earlier in the week by analysts with RBC Capital Markets, who increased RBC’s price target on Ellie Mae to $65 and categorized the company’s stock as “outperform,” citing better loan origination volume for Ellie Mae and other factors.
Overall, the report said, “While we are positive on ELLI’s prospects, the shares are trading at a 7x EV/revenue multiple, which we believe is close to fair value. We maintain our Market Perform rating, and we are raising our price target from $62 to $68, which reflects a 7x EV/revenue multiple using our updated 2016 estimates.”
Here are the three key points from Samad Samana and William Lowden with FBR Capital Markets:
1. 2015 guidance assumes interest rates will rise
The 10-year Treasury rate has increased from 2.03% when ELLI provided 2Q and 2015 guidance to 2.34%. The recent spike, the specter of further rate increases, and the potential impact on future volumes remain top investor concerns. The company noted that its full- year revenue guidance ($223.0 million to $226.0 million; 38%–40% YOY growth) baked in rising rates and a potential headwind to volumes, and that it remains confident in its outlook even as interest rates have started to march upward. We note the company demonstrated in 2013 and 2014 that it can grow even as volumes decline by adding more users, driving ARPU higher with new products and services, and increasing the productivity of its customers.
2. Traction with larger customers continues to increase.
ELLI has experienced great success with small and mid-sized customers but sees penetrating larger customers (400-plus seats) as an important contributor to long-term growth. The company has invested in its technology infrastructure (particularly cybersecurity), product development, and implementation teams to attract and support larger customers. We believe these investments, along with Encompass being able to power all lending channels (correspondent, retail, wholesale, and online), will help ELLI compete for more deals with large customers. Currently, seven of the top 25 originators use ELLI in at least one part of their business. The company is still in the early days of moving up market, but it has seen early success and has a healthy large deal pipeline.
3. Margin expansion expected to resume in 2016.
ELLI has been investing aggressively for the last two years to gain market share, better support its large and growing user base, and be able to be the primary LOS for even the largest mortgage originators. These investments have contributed to robust growth but also to margin contraction. However, the company expects the majority of its investment needs to be met later this year, which should result in a flattening of expense growth. We expect this, and revenue continuing to grow, to result in significant margin expansion beginning in 2016. We believe investors will continue to favor growth over profitability but will see greater efficiencies as a positive development.
