ELLI Mae's Outage

Sorry to bring you bad news about Elli Mae.

ELLI has a lot going for them. They have a reservoir of people already signed up and waiting to be activated (which is like a big backlog), they have recurring income for a large part of their revenue, they have a dominant position which can’t really be challenged (their moat is too strong).

However, looking at this realistically, this was a poor, poor quarter.

This was the second quarter in a row of revenue growing less than 5%, where we had gotten used to growth of 40% to 50%.

Adjusted net income was down significantly for the third quarter in a row. This time from 7.6 million to 4.6 million. (That’s not just a little drop!)

Adjusted earnings were down in a major way for the third quarter in a row too. From 27 cents to 16 cents. (Who cares if they beat even lower expectations).

Second quarter earnings also predicted to be down year over year.

For the full year 2014, they predict earnings equivalent to 2013’s earnings (which was down from 2012) and this prediction is a reduction in their estimates.

The only good news is that this would mean a big improvement in the second half of the year, if it happens.



Thanks Saul. Why do you still own it?

However, looking at this realistically, this was a poor, poor quarter.

This was the second quarter in a row of revenue growing less than 5%, where we had gotten used to growth of 40% to 50%.

That statement really surprises me, Saul. I was thinking it was an amazing sign of business strength: the mortgage industry was basically cut in half as the cycle turned, but ELLI still managed to grow YoY despite that. The mortgage industry is going to be cyclical, and there’s not much the company can do about it except take advantage of its competitors’ weaknesses during the lean times to grab more marketshare (which it seems to be doing effectively). The more marketshare ELLI can grab, the bigger the network effects and therefore its moat, which means more customers and vendors will feel a need to sign up in order to stay competitive and ELLI will continue to gain more pricing power over time. While the stock might not do much for a while, I personally think this is one of the more compelling businesses I own for the long term.

Setting aside the stock for a moment – I know your investment goals are a bit different than mine – do you see something different for the business itself?

Thank you for posting, Saul. I definitely appreciate your perspective.



Neil, I think you are taking a more mature view of ELLI than I was. I guess I had just lost patience with them. Down earnings three quarters in a row didn’t make me happy, especially when they forecast the same thing for next quarter too.

On the other hand, as I said, they have an impressively impregnable moat, and dominate their field. And they are forecasting year over year growing earnings for the last two quarters, which would mean greatly increased earnings from current levels.

But I’ve heard that before. Here’s what they said last August when they reported 2nd quarter results and were very enthusiastic in the conference call:

We are pleased to again raise our full year revenue guidance, despite the current expectations for a decline in mortgage origination volumes for the second half of this year. Also for the full year 2013, we are maintaining our adjusted EBITDA guidance and increasing our adjusted net income guidance. As a result of increased hiring of talent to support the growth of our business and the performance share awards granted, stock-based compensation expense was higher in the second quarter of 2013.”


For the third quarter:
Revenue - $34.0 million to $34.5 million.
Adjusted net income - $8.1million to $8.6 million, or
Adj EPS – 29 to 30 cents.
Adjusted EBITDA - $12.1million to $12.9 million.

For the year:
Revenue - $131.0 million to $132.5 million, up from the previously provided ranges of 127.5 to 129.0 and 130.0 to 131.5.
Adjusted net income – up to $30.7 million to $31.5 million, or $1.08 to $1.11 per diluted share.
Adjusted EBITDA –unchanged at $44.2 million to $45.4 million.

These were rosy estimates and they obviously expected to beat them handily. They were in August already and should have had a good handle on the third quarter, at least.

What actually happened was adjusted earnings of 25 cents for the quarter (down from 35 cents and down sequentially from 29 cents). The fourth quarter was worse at 18 cents and they finished with 99 cents for the year. They must have expected 1.15 to 1.20 themselves, although they didn’t say it.

I sure would like to see good results but I tend to feel I’ll believe it when I see it. As I mentioned in my end of the month positions, I’ve been reducing my ELLI to buy things where I think I have a clearer view, but I could be wrong, and if ELLI beats convincingly next quarter, they could fly away.



yahoo finance shows ELLI w/ a pe of 77 as of 5.4.14.

Like social media!

Rizzz, that may be GAAP figures. The real PE is high (about 28), but not THAT high!


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