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Edited Transcript of ELLI earnings conference call or presentation 27-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Ellie Mae Inc Earnings Call

PLEASANTON May 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Ellie Mae Inc earnings conference call or presentation Thursday, April 27, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alex Hughes

Ellie Mae, Inc. - VP of IR

* Jonathan H. Corr

Ellie Mae, Inc. - CEO, President and Director

* Matthew LaVay

Ellie Mae, Inc. - CFO and EVP

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Conference Call Participants

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* Brandon Burke Dobell

William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services

* Brent Alan Bracelin

Pacific Crest Securities, Inc., Research Division - Partner and Senior Research Analyst of Cloud Software and Analytics

* Brian Jeffrey Schwartz

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Jackson Ader

* John Robert Campbell

Stephens Inc., Research Division - Research Analyst

* Mayank Tandon

Needham & Company, LLC, Research Division - Senior Analyst of IT Services of Financial Technology

* Patrick D. Walravens

JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst

* Richard K. Baldry

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* Ross Stuart MacMillan

RBC Capital Markets, LLC, Research Division - Co-Head of Software Sector

* Saket Kalia

Barclays PLC, Research Division - Senior Analyst

* Thomas James Robb

Morgan Stanley, Research Division - Research Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Ellie Mae's Q1 2017 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Alex Hughes. Please go ahead, sir.

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Alex Hughes, Ellie Mae, Inc. - VP of IR [2]

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Good afternoon, and thank you for joining us today on today's conference call to discuss Ellie Mae's first quarter 2017 result. This call is being broadcast live over the web, and can be accessed for 90 days in the Investor Relations section of Ellie Mae's website, www.elliemae.com. Joining on today's call are Jonathan Corr, Chief Executive Officer; and Matt LaVay, Chief Financial Officer. We would like to remind you that during the course of this conference call, Ellie Mae's management team will make projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are simply predictions, and actual results and events may differ materially. We refer you to the documents that company files from time to time with the Securities and Exchange Commission, specifically the company's forms 10-K and 10-Q. These documents identify important factors and could cause actual results to differ materially from those contained in our projections or forward-looking statements. I also want to inform our listeners that management will make some references to non-GAAP financial measures during the call. You'll find supplemental data in the company's press release, which includes reconciliations of the non-GAAP measures to comparable GAAP results.

Now I'd like to turn the call over to Jonathan Corr, Chief Executive Officer.

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [3]

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Thanks, Alex, and good afternoon, everybody, and thanks for joining us today. I'm pleased to report that we're off to a solid start to the year. Bookings in revenue growth remain strong, the popularity of our all-in-one Encompass lending platform continues to increase throughout the industry and the team continues to deliver on our technology roadmap, further solidifying our market position. On today's call, I'll discuss our Q1 highlights and progress in each of these areas before I hand it over to Matt to walk you through our financial results and outlook. We delivered strong Q1 revenue growth of 26%, hitting the high end of our guidance range. We're able to achieve this despite the industry volume composites, which includes MBA, Fannie Mae and Freddie Mac declining 34% sequentially, or 3 points more than when we guided last quarter, which demonstrates the strong tailwinds we're getting from our record 2016 bookings and the ramp of these users on our platform. We were pleased to see the strength of our bookings continue through the first quarter. Q1 bookings of 12,100 was well-ahead of expectations and brings total contracted users to over 225,000. Bookings were led by new customer wins, but we also continue to see a healthy mix of existing customers adding seats. We had solid success across all segments, but particularly strong momentum with enterprise accounts.

The growing popularity of Encompass was on full display this March at our annual user conference, Experience, held in Las Vegas. This year's conference sold out with a record 3000 attendees, an increase of over 30% from last year, engagement was high with over 100 sponsors and exhibitors and 900 people attending our Encompass training sessions. Those attending Experience were introduced to important new elements of the Encompass Lending platform, including our Encompass Connect Suite of Products. With each products serving key constituents in the mortgage origination process, including consumers, loan officers, third-party originators and developers. Each of these products is generally available today. We have also previewed Encompass NG, the next-generation of Encompass which will release progressively starting with the mid-market customers then to strategic and enterprise customers throughout 2018. All of these next-generation elements leverage a new, open, secure and scalable architecture, so that lenders and partners across the network can work more efficiently and seamlessly.

We believe this takes the power of our platforms to another level, positioning us to gain additional market share and extend further into the enterprise segment. As we look at the overall mortgage environment, the composite index points to the industry volumes down about 20% in 2017, driven by a drop in refinances. But we're encouraged to see a healthy purchase market materializing. Purchase loans comprised about 63% of originations in March, and the trend towards purchase is expected to remain driven by increased demand in an improving economy. Although regulation is still important and likely to remain so even with all the talk of deregulation, innovation is the primary focus of customers and prospects. Innovation will be increasingly important as customers look to pushing themselves for the growing purchase market and the needs of this enormous millennial population as they further enter the market this year.

The team remained focused on ongoing execution, and the second half looks to be setting up well. We expect to add 8000 to 10,000 seats per quarter for the remainder of 2017, and this, combined with the large base of enterprise users ramping production on our platform from sales during 2016, gives us confidence that we can grow revenue 20% to 22% in 2017. Moreover, we believe the strong value proposition of our product offerings and the new innovations that we're working on position us well to drive long-term growth.

With that, I will hand it over to Matt to cover the financials.

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Matthew LaVay, Ellie Mae, Inc. - CFO and EVP [4]

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Thank you, Jonathan. Good afternoon, everyone, and thank you for joining us today. As Jonathan said, we had a great first quarter. Total revenue was $93 million, an increase of 26% from Q1 of 2016. Contracted revenue in the first quarter increased 37% year-over-year to [$62.9] million, representing 68% of total revenue. Revenue for active Encompass user increased 6% year-over-year to $551 despite industry loan volume declines, demonstrating increased adoption on our platform.

As Jonathan mentioned, bookings remain very strong through the first quarter with an additional 12,100 seats booked, bringing total contracted users to over 225,000. Given that we continue to add seats at a very high rate and that many of these are in the enterprise space or implementation times stretch longer, active users as a percentage of contracted remained at 76% for -- in the quarter. The seasonally slow winter months of January and February also played a role. We expect active seats to trend towards 80% over the course of the year. Implementation in professional services revenue increased year-over-year as we continue to on-board customers resulting from our prior strong bookings.

Services revenue represented approximately 10% of total revenue in the quarter. The mix on service revenue increased because it is less sensitive to loan volume, and in the first quarter, we recognized revenue associated with training sessions offered at our Q1 experience conference. For the full year, we expect services revenue to be approximately 8% to 10% of total revenue.

GAAP gross margin for the first quarter was 63%, down 3 points sequentially. This reflects sequentially lower Q1 revenue as well as a rollout of our Connect suite of products. On a non-GAAP basis, gross margin was 65%. GAAP net income for the first quarter was $9.6 million or $0.27 per diluted share, compared to $2.5 million or $0.08 per diluted share in the first quarter of 2016. This includes the impact from recent changes to the treatment of tax-related stock compensation benefits and net income per share also reflects the addition of 3.2 million shares issued in our [August follow-on] offerings. The tax rate on a GAAP basis was approximately 37% in the first quarter. On a non-GAAP basis, adjusted net income for the first quarter was $8.9 million or $0.25 per diluted share compared to $7.6 million or $0.24 per diluted share in the first quarter of 2016. And on a per-share basis, also reflects the impact from an additional 3.2 million shares. Adjusted EBITDA in the first quarter was $20.8 million compared to $15.6 million for the first quarter of 2016.

Now shifting to the balance sheet and cash flow. We finished the first quarter with cash and investments of approximately $448 million, down $21 million sequentially. Cash flow from operations was minus $1.4 million in the first quarter, which reflects the timing of payments for the company's annual incentive compensation plans as well as seasonally lower Q1 revenue.

In addition, Q1 CapEx, including both capitalized development costs and hard capital purchases, was approximately $23 million. CapEx tends to run higher in the first quarter due to upfront investments. For the year, we continue to expect CapEx to be approximately $93 million to $95 million, which includes approximately [$13] million for facilities expansion. We remain on track to generate free cash flow of approximately $55 million to $65 million in 2017.

Now turning to the rest of our guidance. Our 2017 annual guidance takes into consideration industry forecast for mortgage origination volume. We used the composite estimates of mortgage origination volume as published by Fannie Mae, Freddie Mac and the Mortgage Bankers Association to forecast certain portions of our business. For 2017, this composite shows an estimated 21% decline in origination volumes from 2016, which is driven entirely by an expected decline in refinance activity. For the second quarter, origination volumes expected to increase 28% sequentially due to seasonality and declined 13% year-over-year. The detailed blended forecast data can be found on our supplemental data sheet that is posted on the Investor Relations section of our website.

As Jonathan noted, we expect to add seats at a rate of 8,000 to 10,000 a quarter for the remainder of 2017. We expect this combined with our large base of users ramping on our platform to drive growth despite lower industry mortgage volumes in the year. As a result, we continue to expect annual revenue in the range of $433 million to $440 million. Net income on a GAAP basis is now expected to be in the range of $50 million to $55 million or $1.37 to $1.49 per diluted share. Adjusted EBITDA is expected to be in the range of $139.5 million to $147.4 million. Adjusted net income for the year is expected to be in the range of $65.6 million to $70.7 million or $1.79 to $1.92 per diluted share. Turning to the second quarter of 2017, we expect revenue to be in the range of $109 million to $111 million. Net income is expected to be $15.7 million to $16.4 million or $0.43 to $0.45 per diluted share. Adjusted net income is expected to be in the range of $18.2 million to $19.2 million or $0.50 to $0.53 per diluted share. Adjusted EBITDA is expected to be in the range of $37.5 million to $39.1 million.

And finally, before we turn to your questions, I'd like to highlight that this quarter we'll be presenting at the Needham Emerging Technology Conference in New York on May 16th, and the JP Morgan Global Technology Conference in Boston on May 23. With that, I'll turn it over to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Sterling Auty with JP Morgan.

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Jackson Ader, [2]

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This is Jackson Ader for Sterling. Jonathan, you mentioned that there was a good mix between new customers and existing customers with the 12,000 seats booked. What was that mix, if you had to put a ballpark percentage on it?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [3]

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Kind of rough swagged probably about 75% to 80% was straight new business and the other part was customers expanding as they look towards the purchase market going forward.

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Jackson Ader, [4]

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Okay. And then, as a follow-up, what does the enterprise pipeline look like. If we're expecting that the gap between active users and contracted users to narrow towards 80%. Does that imply that maybe the enterprise pipeline isn't as strong? Or do you just have so many active or contracted seats in backlog waiting to become active, that it's going to be hard to overcome that trend going to 80%?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [5]

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No. I think it's, as you said, we've got a lot in backlog. So as those folks deploy, that will start to close the gap. But at the same time, we're going to continue to sell more as we go forward. So that's going to continue to add some extra seats that will slowly allow that number to come up. But both the pipeline of things we're implementing as well as the enterprise pipeline of what we're seeing today and well into the future, looks very strong.

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Operator [6]

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We'll take our next question from Saket Kalia with Barclays Capital.

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Saket Kalia, Barclays PLC, Research Division - Senior Analyst [7]

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So maybe first for you, Jonathan. You mentioned you had especially strong success with enterprise accounts. Can you just talk about what's driving some of the new business with enterprise accounts, and whether maybe some of those reasons have changed? We've always talked about sort of success begetting success, any enterprise you talked about now little bit about innovation may be becoming just as important as regulation. What do you feel like is maybe driving that better success in enterprise as you go on?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [8]

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Well, I definitely think it is success begets success. That's kind of the foundation of it. And just the -- the table stakes in terms of being able to have the regulatory capabilities, also were a foundation. But truly what we're seeing and we saw it in full force at Experience and we're seeing it in full force as we engage with both existing customers and new prospects in the enterprise category, everybody is really focused on innovation. They are focused on the tremendous set of capabilities that we started rolling out with the Connect suite, especially the Consumer Connect and third-party Origination Connect. And the Developer Connect, which introduces the APIs, which allows these guys to really think about making the lending platform their own. And as I have said in the past, I've always felt pretty optimistic about larger and larger enterprise accounts coming our way. That optimism continues to increase. And as I look out, out beyond this year even into early '18, I feel even more positive about the fact that enterprise customers, all the way up to the top of the food chain, are really excited about what we're doing and what we continue to do.

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Saket Kalia, Barclays PLC, Research Division - Senior Analyst [9]

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Got it. Got it. And then for my follow-up, and maybe Matt just for you. We talked a little bit about the healthy ramp from some of your seat bookings in 2016. Can you just talk qualitatively about how that ramp in productivity is maybe comparing versus your expectations?

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Matthew LaVay, Ellie Mae, Inc. - CFO and EVP [10]

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Sure. So actually the ramp-up productivity is very consistent with our expectations. As you know, larger, more complex enterprise customers take a bit longer to ramp to productivity than smaller, less sophisticated customers. And so we build all that into our models, and we're able to -- so we basically forecast using these assumptions. So yes, when you see the great secret that we've had last year and then in the first quarter of this year, we consider the fact that you have got a significant enterprise component. We build that into our assumptions, and so the ramp times that we are seeing are just as expected.

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Saket Kalia, Barclays PLC, Research Division - Senior Analyst [11]

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Got it. If I could just squeeze one housekeeping question for you, Matt. Could you disclose what the average closed loans per active seat was in the quarter?

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Matthew LaVay, Ellie Mae, Inc. - CFO and EVP [12]

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Yes, the active -- the average closed loans per seat was approximately one per month in the quarter. But as typically happens, as we move through the year, you have seasonal effects. And so Q1 is a seasonally low quarter. So when you think about how we progress through the quarter, you had a very weak January and February, and then we started to see March move into the springtime, kind of seasonality impact. And so we actually exited the quarter about 1.2 per user per month.

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Operator [13]

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Our next question comes from Brandon Dobell with William Blair.

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Brandon Burke Dobell, William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services [14]

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Maybe Jonathan, your comment about innovation. I recognized that because the regulations are not changing too much, your customers feel like they've got a little more latitude to do stuff. But as you talk with them about what they think innovation is or how they define it, how much does that definition line up with what you guys think about or offer, or are they looking at different ways to run their business or different things to do with their customer base that don't line up yet with what you guys offer?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [15]

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No. I think we're completely aligned with where our customers are looking to innovate. As our customers have looked to extend more aggressively into the wholesale and particularly in correspondent our TPO Connect capability, is really attracting larger and larger corresponding investors. So we're excited about that. Consumer Connect, again everybody is thinking about how they can create their or their own digital lending experience. And our launch of that -- our release of that in the last month has already got hundreds of customers in the stages of setting it up and deploying. And then what we're doing, I think in terms of data and open APIs, it's just -- it's kind of the perfect value proposition for where many of these large lenders are starting to think about things, which is embrace a partner that has a technology platform that they can scale on, and make it their own by extending it with open [restful] APIs. So all lining up really well for us.

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Brandon Burke Dobell, William Blair & Company L.L.C., Research Division - Partner and Group Head of Global Services [16]

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Okay. And last one for me, another spin with the regulations now being a little more, I guess set, whatever word you want to use, there's a little more demand, it seems like, or at least early talk about it for nonconventional, non-QM. So loans that are still quality but don't meet the exact definitions of the regulations. How do you think about that opportunity set relative to different types of customers you serve? And is there anything systems-wise or technology-wise that puts you in a particular position to take advantage of that? Or something you to do to address that opportunity?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [17]

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There is nothing system-wise that we have to do to be able to support that. Really the question is, as maybe some of the regulation gets a little more transparent, that lenders start getting willing to go outside the conforming conventional QM box because they feel like they actually know what the penalties might be for making a mistake. And ultimately, that might actually increase credit availability beyond what we're seeing. But we have the capabilities in our technology. It's a matter of lenders being willing to go that way. I think that will eventually happen as we go through '17 into '18, but -- and we're well prepared for it.

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Operator [18]

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Our next question comes from Mayank Tandon with Needham & Company.

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst of IT Services of Financial Technology [19]

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Matt, I think on the Analyst Day, you basically walk through some of the math around the user growth and ARPU growth. Could you just remind us in terms of the year-end outlook for this? Your -- how you're thinking about the breakdown of growth between users and ARPU?

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Matthew LaVay, Ellie Mae, Inc. - CFO and EVP [20]

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Sure. So as you heard, we had solid growth in the average revenue per user in the first quarter. So what we have to think about, when we think about the year, we have to be mindful of the headwinds that we're facing and so forth. So I think, you can expect that as we continue to grow the business and onboard our enterprise customers, you'll see that ARPU tend to trend up over time, but you still have to seasonality effects that are baked in there. So I think you can expect to see overall growth again associated with the ramp of the enterprise users and those folks becoming more productive, and creating more revenue per user. But at the same time, you've got the industry kind of headwinds there, so that could mute that growth just a bit as you think about the entire year.

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst of IT Services of Financial Technology [21]

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So the 20% to 22% top line growth will be skewed more toward the user growth versus ARPU growth or will that be split pretty evenly between the two for the whole year? I thought I'd heard 10% at the Analyst Day, but I could be mistaken on the ARPU...

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Matthew LaVay, Ellie Mae, Inc. - CFO and EVP [22]

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Yes, I would think of it kind of split between the two for the year. You have got factors going both ways there. So that's the way I think about it.

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Operator [23]

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Our next question comes from Brent Bracelin with Pacific Crest Securities.

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Brent Alan Bracelin, Pacific Crest Securities, Inc., Research Division - Partner and Senior Research Analyst of Cloud Software and Analytics [24]

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Matt, I want to just follow-up on pro services comment, you mentioned that was what looks like was particular strong in the quarter, you talked about training as one of the drivers there. My guess, my follow-up question here on that segment is, are there other implementation services or on-boarding services that you're all set -- that also drove upside? Or was it entirely tied to kind of training -- the training benefit? It looks like in my model that was up over 90% year-over-year. So what else drove that strength in pro services beyond just training?

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Matthew LaVay, Ellie Mae, Inc. - CFO and EVP [25]

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Sure. Yes. So you kind of hit it -- the nail on the head there. There are several components to the increase. Yes, training is a factor, which is associated with our user conference. So there is some increase there year-over-year. But you also have to think about the extent of the user additions that we had in 2016 and into the first quarter of 2017. So associated with those users, we increased demand for implementation services. So we're ramping up our professional services team to meet that demand, that's a piece of it. But then you also have to think about our existing users, and the fact that they are becoming more productive over time and so we offer services to really help them optimize the usage of our systems. And so we have online -- or we have help that we deploy to the field to meet that demand as well. So you have to think about all 3 of those components when you think about the increase. So it's really trending upward with just the overall growth of the business in all fronts.

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [26]

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Yes. I'll add a little bit to that. The fact is, our customers really embrace a partnership with us. And as an important as it is, as we first deploy the customer, it's all -- as we've always talked about, in driving more value with the customer, allowing them to adopt more, penetrate more, drive more top line, figure out ways to help them be more cost efficient. And so there's sets of services, that they have, they embrace from us. All the way from the implementation and training to enterprise tech-support, to even some optimization consulting when it comes to looking at how to do things paperless or digital lending, et cetera. So it's a -- it's really a function of the success we're having in terms of building these partnerships with the customers.

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Brent Alan Bracelin, Pacific Crest Securities, Inc., Research Division - Partner and Senior Research Analyst of Cloud Software and Analytics [27]

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Great. My last follow-up is on kind of the revenue per loan. If I kind of back into the numbers there, given kind of volumes were lower this quarter. Looks like the absolute dollars per loan is going up. Is that just tied to a higher tax rate on purchase loans? Where you guys are collecting more transactional fees? What's the driver on the uptick in revenue per loan?

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Matthew LaVay, Ellie Mae, Inc. - CFO and EVP [28]

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Well, so revenue per loan is quite a bit impacted by the user additions that we previously talked about. So as users roll onto our platform, they tend to adopt more services over time. And so what you're seeing is a long-term trend for -- with all the -- again, the over 50,000 users that we added last year and the great quarter we had this year, of folks becoming implemented and then starting to ramp up the usage of our services. And so that's really helping to drive the revenue per loan up over time. And we will expect to continue to see that happen as we move through the year.

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Operator [29]

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Our next question comes from Brian Schwartz with Oppenheimer.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [30]

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I have one for Jonathan and a follow-up for Matt. Jonathan, I want to build on kind of a commentary about the strength that you're seeing in the enterprise and the bookings in the pipeline. We're all sitting back here, we're trying to understand better what that megabanks are thinking in terms of outsourcing the technology of the originations process to a platform supplier like Ellie Mae. Because we know these megabanks, they are embracing the cloud aggressively for cost savings. So the megabanks, clearly today, it's not a target market for the business. But the question I want to ask you, is there anything that you are doing either with the technology, architecture or awareness in the market? Or anything that you're seeing you're hearing today that could point to a good replacement cycle opportunity among those megabanks in the future at some point?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [31]

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Yes, good question, Brian. It really -- it is one of those things where these are long cycles, and I would say, and I kind of alluded to it earlier in one of my responses, I'm getting more and more optimistic about the long-term opportunity with some of these megafolks. Obviously, it's not going to benefit us. These are long cycles. We're not going to see that benefit in '17. But as we look out beyond '17, the things that we're doing -- the things that we're doing with our open lending platform, the capabilities that we're bringing to bear in terms of workflow automation, the things that we're bringing to bear in some of our data and data science work, and the open APIs are really attracting the attention of some of the leadership at these key institutions. So the conversations have definitely increased. But these are long cycles. And you're always hopeful, but it's something that's going to take a fair amount of time to make some realization.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [32]

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And the follow-up question I had for Matt is, typically with the model, it's around the EBITDA margin ramp here for the rest of the year. And typically, that's been the seasonality of the model in the past. But it does look like the margins are going to need to step-up quite a bit here over the next 3 quarters to hit the annual target. So can you talk through a kind of, again the points of operating leverage that you have for the business that gives you confidence in achieving the margin ramp ahead?

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Matthew LaVay, Ellie Mae, Inc. - CFO and EVP [33]

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Sure. Sure. So there's two parts to the answer. First, taken the gross margin component of that. You're seeing some traction as we move through the year in the gross margin level because there's a fixed component to that relating to the people that we have added to help with the building of the next-GEN. We've made those investments. So you're seeing a leveling off in that component of the gross margin as we move through the year. And then similarly on the operating expense side, again our #1 cost is in our people. And again, we really invested in that, in the people side of the business over the last couple of years. And so, what you're seeing is a leveling off of that investment as we move through 2017 and into 2018. And so that's helping to create more stability or a lower rate of increase in those operating expenses relative to revenue. So both of those combined are really helping with the EBITDA overall as we move through the year.

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Operator [34]

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We will take our next question from Brian Essex with Morgan Stanley.

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Thomas James Robb, Morgan Stanley, Research Division - Research Associate [35]

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It's Thomas Robb on for Brian. Just want to ask a quick question on the active user percent as we go through the year. I think you guys said that, that's 76% in 1Q. So what kind of -- I guess, what confidence level that you -- do you guys have that this reaches like 80% by the end of the year? And I think you guys keep saying it ramps, but any other color on like how that progresses through the remainder of the year?

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Matthew LaVay, Ellie Mae, Inc. - CFO and EVP [36]

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Sure. This is Matt, happy to take that. So as we've discussed, the -- we're at a 76% active as a percent of contracted user level today. And that level is driven a lot again by the volume of the user additions that we've had last year and into this year. So if we assume, the 8,000 to 10,000 additions through the remainder of the year, we'll expect to see that kind of -- all of the folks that we've added to the platform starting to become productive as we move through the year. That kind of bubble. And you'll expect to see that ramp-up toward 80% pretty steady as we go through the year. It's not really a lumpy thing. It's kind of more as -- we steadily added people over the quarters. And so they will steadily become productive over the future quarters and you'll see the percentage trend upwards. So kind of a nice curve, even curve, if you'll.

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Thomas James Robb, Morgan Stanley, Research Division - Research Associate [37]

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Okay. And then maybe really quick on just interest rates. It seems like they have kind of like stabilized, maybe even like came down a little bit again in the last quarter or so. How are your customers looking at that, especially the banks and are they -- I mean, is that changing their spending habits at all? Or their outlooks on, I guess like their CapEx or the business outlooks or anything like that?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [38]

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So our customers, I'd say -- and I'd say most of the industry, not everybody, but the vast majority of the industry, as they were looking towards this year, most of these folks had retooled themselves in 2016 to be focused on a purchase market. That refi was going to slow as rates started to rise with the ongoing improving economy. So the benefit they got last year was they go a little bit more business with the same number of people. Now they clearly see a picture that shows a improving purchasing market that looks through this year, and for all forecasts, looks real positive for the next number of years. And so what we're seeing is lenders really think about, how do they position themselves to get their fair share of that market. And so, we're seeing people invest to make sure that they can serve the purchase market. They can be innovative. They can serve the growing group of millennials who want a greater digital experience. So in general, the tone is very positive. When you have refi booms, people get too busy. Right now, people are solidly busy, but they've time to make a decision, and they see a clear path to continue growth into the future.

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Operator [39]

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Our next question comes from John Campbell with Stephens Inc.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [40]

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So nice work on the bookings. Jonathan, it sounds like you guys are going to stick with that 8,000 to 10,000 bookings clip per quarter. If I look at last several quarters, you've come in comfortably ahead of that. So is that 8 to 10 range, is that just conservatism or is there something structural or something in particular you're seeing that's going to trigger a slowdown in the quarters ahead?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [41]

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The 8,000 to 10,000 is what we kind of run the plan at both in terms of how we think about our overall model, forecast, guidance. The team has outperformed. And I'd love to see them keep doing that, but again, how I'm planning and how the team is planning, is to continue to deliver on that target of 8 to 10.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [42]

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Okay. And then, just going back to another question I think you answered, I think you said the 75% of the bookings were new logo seats. Can you maybe give us a swag on the breakout of the enterprise, large and mid-market?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [43]

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Yes. I mean, I'd say -- I mean, you got to think about the number of deals. The number of deals obviously is going to be much greater in the mid-market because they are smaller deals. But in terms of breaking it down to strategic and enterprise kind of combined, that probably makes up about 80% of the new seats.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [44]

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Okay. And then last one from me, on churn, last year that was exceptionally low, great year for you guys. It looks like it did pick up a little bit in the quarter. Is there anything to call out here from the quarter and any kind of expectations around -- as industry volumes contract later this year, do you see that picking up at all?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [45]

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No. I kind of look at it was around 1-ish-percent-or-so, which from our perspective is kind of annualized 4%. So that's still very high retention rate that we expect to be in the high 90s. So I don't think there is anything unusual in there. We had some -- maybe some shifting going around, couple of customers got acquired and couple of others there that might have changed things slightly, but that's about right.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [46]

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Okay. And one -- I guess, one last one. Any update on EverBank, I know they were going through an acquisition. Any update on what those guys are going to do with their seats?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [47]

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Yes, I mean, EverBank is now part -- is being acquired by TIAA. They are the mortgage business for those guys. So that is -- our expectations is having obviously met with those guys in person here, talking strategically about where they are going. TIAA is looking at them as the platform for them to expand upon.

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Operator [48]

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Our next question comes from Richard Baldry with Roth Capital Markets.

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Richard K. Baldry, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [49]

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With the volumes in the market easing a bit, I would think that some of the small vendors in your ecosystem might be seeing a little challenging environment. [So with] the cash that you put on the balance sheet, maybe 9 months ago, just sitting there, can you maybe update us on the M&A environment? Do you think there's any improved opportunities with some of those players who might be a little stressed now or any strategic thoughts on that overall?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [50]

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Yes, Richard. There is definitely opportunities out there. There's activity we've been looking at things since we did the additional raise last summer. We have not found the ones that makes sense yet. We were very disciplined. I mean, we've obviously done 8 to 10 over the years. And it's really about finding the right product, the right team, at the right price. And all of us have to come together to make it a success. And want to be disciplined about what we're doing. And we just haven't found the right fit that fit all those criterion (sic) [criteria] right now. But our expectations is, we will do something or number of things in the future and it's just a matter of time.

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Operator [51]

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Our next question comes from Ross MacMillan with RBC Capital Markets.

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Ross Stuart MacMillan, RBC Capital Markets, LLC, Research Division - Co-Head of Software Sector [52]

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Jonathan, I think you introduced some price changes in the quarter. And I wonder if you could just talk to those? And my real question is, how they impact existing customers versus new customers. How should we think about, if you will, the price increase roll through?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [53]

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So yes, we are, as we have done historically over time, going through incremental price increases based on the continued value we add to the platform. And those kind of went into effect towards the latter part of Q1. So we really haven't seen much in the way of impact yet, both in the terms of the renewals that take place as well as new customers. And as you recall, we are renewing probably about a quarter of our customers every year or so. So as you think about it, this starts to roll in, but it -- the amount of impact is I'd say relatively modest in 2017 versus the amount of impact that it has as it builds out into '18 and '19. So we haven't had any issues with receptivity to it. But as those go into play, you kind of think about it cascade, it's going to build up as we go through the quarters and really becomes a little bit more material as we get to the end of the year.

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Ross Stuart MacMillan, RBC Capital Markets, LLC, Research Division - Co-Head of Software Sector [54]

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That's helpful. And maybe just one clarification. So Matt, you said the [actives] will move towards sort of a 80% exit rate. I think that implies that active user growth will be a little bit higher in '17 versus '16. I just wanted to confirm that with you. At least that's what our model suggests, slightly higher active user growth this year than last year?

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Matthew LaVay, Ellie Mae, Inc. - CFO and EVP [55]

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Yes, that's correct. That's a result again of the enterprise additions we had last year which drove it down. And then the maturing of those users through 2017 that then tend to bring it back up.

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Operator [56]

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Our next question comes from Pat Walravens with JMP Securities.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [57]

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Can I ask just, why -- so what key points would you make about why you lowered the top end of the guidance range for the year?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [58]

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We didn't lower the top end of the guidance range.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [59]

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Okay, good. All right, sorry about that. Then I would say how should we think, I mean, Jonathan I know I ask you this a lot, but just sort of in the current environment, how should we think longer-term about what the -- what the right growth rate is for this business?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [60]

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As we've said, we think that the target long-term growth rate right now is how we're driving the business, what we're doing, how we're thinking strategically. And we are actually in our cycle of our revising our 5-year strategic plan. Our target is to grow at 25%. So that's how I would think about it at this point.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [61]

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Okay. And basically, so just as the mortgage volumes start dropping so much and normalize we should be able to expect to get back to that. Is that a fair?

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [62]

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I mean, I kind of look -- we look at the volume like -- really, we're in this transition year, where refis are really dropping down to a kind of a normalization level, where they've become 25% maybe of the volume. And what drives the market going forward is the purchase market. And really as you look out to all the projections over the next few years, it looks to be level or growing. And I think that becomes really a function of how much inventory gets built. Because there's definitely the demand out there.

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Operator [63]

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It appears there are no further questions at this time. Mr. Corr, I'd like to turn the conference back over to you for any additional or closing remarks.

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Jonathan H. Corr, Ellie Mae, Inc. - CEO, President and Director [64]

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Great. Thank you so much, and thanks everybody for joining the call today. We are really pleased with our first quarter results, and we are really encouraged by the prospects for the remainder of the year. So look forward to seeing many of you at the conferences over the next quarter, and updating everyone on the next call. Thanks again for joining us and supporting us.

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Operator [65]

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Ladies and gentlemen, that does conclude today's presentation. Thank you for your participation. You may now disconnect.