Earnings Fall at Ellie Mae Despite Rising Sales, Market Share

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The mortgage market has been in a state of flux lately. Housing demand has been strong, helping to drive new-home purchase loans. But the wave of refinancing transactions that occurred when mortgage rates were routinely falling has come to an abrupt halt in the wake of rising rates. Ellie Mae (NYSE: ELLI) has done a good job of helping its mortgage-lender clients boost their productivity, even in light of tougher times in the industry, but the company has struggled to bounce back from fears about the impact of higher interest rates on its business

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Coming into Thursday's fourth-quarter financial report, Ellie Mae investors expected sales to climb, but they anticipated that the company's bottom line would keep showing signs of pressure. Ellie Mae wasn't able to avoid the hit to earnings, but it did show signs of growth that indicate an ability to fight off some of the more difficult conditions in the market right now. Let's look more closely at Ellie Mae and what its latest results have to say about its future.

How Ellie Mae fared to finish 2017

Ellie Mae's fourth-quarter results weren't uniformly rosy, but they were largely better than what most had hoped for from the mortgage-lending platform provider. Revenue of $112.9 million was higher by 17% from the year-ago quarter, topping the 12.5% growth rate that most of those following the stock were expecting to see. Adjusted net income was down a sharper 27%, to $11.8 million, but the $0.33 per-share figure on adjusted earnings was better than the consensus forecast among investors for $0.25 per share.

The most encouraging part of Ellie Mae's results was the number of new seat bookings that the company brought in during the quarter. With 11,000 Encompass seats booked, Ellie Mae brought its annual total to more than 40,000, and the 2,900 seat increase compared to the third quarter reversed a troubling trend of shrinking bookings that had gotten established earlier in the year.

On the other hand, Ellie Mae continued to see pressure on the expense side of the income statement. Costs of revenues rose nearly as much as revenue, limiting gross profit growth and hitting gross margin hard. Operating expenses climbed 27%, with particularly large percentage gains in overhead expenses and sales and marketing costs. That nearly wiped out Ellie Mae's operating income, leaving it to the benefits of tax reform to help get GAAP net income close to what the company brought in during last year's fourth quarter.

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CEO Jonathan Corr was upbeat about the results. "It was a great finish to the year," Corr said, "as we continued to gain market share and extend Encompass further into the enterprise segment." The CEO pointed to how the quarter exceeded Ellie Mae's expectations as lenders move toward the Encompass NG platform and responded favorably to other new products.

Can Ellie Mae make more money?

Ellie Mae thinks that there's a lot more progress that it can make. In Corr's words, "We see tremendous long-term growth opportunities as we drive toward our goal of end-to-end automation of the mortgage process."

The mortgage-software specialist's guidance was mixed, failing to satisfy every investor in the company for the immediate future, but with better projections further out into the future. Ellie Mae projected that revenue in the first quarter will be between $107 million and $109 million, which is what the company had originally projected for the fourth quarter of 2017. Adjusted net income should work out to $0.07 to $0.09 per share.

Both figures are somewhat less than what investors following the stock want to see. For the full year, revenue of $495 million to $505 million and adjusted earnings of $1.68 to $1.78 per share would both be better than initially anticipated.

Shareholders seemed to react more favorably to the latter set of numbers and ignored the former set, and the stock climbed 3% in after-hours trading following the announcement. At least for now, Ellie Mae is holding up in an increasingly difficult mortgage market, but investors need to pay close attention to make sure that favorable aspects of the company's business continue.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ellie Mae. The Motley Fool has a disclosure policy.