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Ellie Mae (ELLI): Zacks Rank Buy

Zacks Equity Research

Earnings estimates for Ellie Mae, Inc. (ELLI) are rising after this provider of mortgage automation software announcing impressive second quarter results, including a positive surprise of more than 90% and a raised fiscal 2012 guidance. All estimates for this year have moved higher in the past week, underscoring the company's Zacks #1 Rank (Strong Buy).

Currently, the stock is trading around its 52-week high. There is also a potential for further upside based on Ellie Mae's solid growth projection for fiscal 2012 and the Fed's decision to make open-market purchases of mortgage securities.

Stellar Q2

On August 1, 2012, Ellie Mae reported fiscal second quarter 2012 earnings per share (EPS) of 23 cents, beating the Zacks Consensus Estimate by a massive 91.67%. Net sales jumped 106.0% over the comparable prior-year quarter to $23.6 million, topping the Zacks Consensus Estimate of $20.0 million.

The revenue improvement was mostly driven by rapid adoption of its on-demand SaaS Encompass solutions by mortgage firms. On-demand revenue surged 112.0% year over year. Revenues from on-premise solutions (which include software products and license fees) surged 72.0% year over year.

Gross margin improved 820 bps from the year-ago quarter to 77.6%. Despite a 62.3% year-over-year increase in operating expenses, operating margin increased significantly to 22.3% from (0.6%) in the year-ago quarter. The rise in expenses was more than offset by a higher level of cost absorption.

Guidance Upbeat

For the third quarter, Ellie Mae expects revenue between $23.75 million and $24.25 million. Projected non-GAAP net income is expected between $5.0 million and $5.4 million, while non-GAAP EPS is seen at 18 cents to 20 cents. Expectations for sustained business momentum and a favorable mortgage environment led the company to raise its fiscal 2012 guidance. Ellie Mae now expects fiscal 2012 revenue of $90 million to $91 million, up from the previous range of $78.0 million - $79.0 million. Non-GAAP net income is expected between $17.1 million and $18.0 million, up from $9.6 million to $10.1 million. Non-GAAP EPS is seen between 68 cents and 72 cents (previously 42 cents - 45 cents).

Zacks Consensus Estimates Jump

All 8 estimates for the third quarter have advanced in the past 7 days.. The Zacks Consensus Estimate for the quarter has surged 233.3% to 20 cents.

The full-year 2012 estimate also went up unanimously in the past week as all 8 estimates increased, lifting the Zacks Consensus Estimate by 66% to 73 cents. Meanwhile, the Zacks Consensus Estimate for 2013 is up more than 25% to 74 cents.

Valuation Looks Attractive

Ellie Mae shares are up 337.61% year to date compared with a 9.2% increase for the S&P 500.

Shares are trading at a premium to its peers. It has a forward P/S of 6.72 and a P/B of 6.02, against 1.95 and 1.56, respectively, for its peers. The PEG of 1.5 is also higher than the 0.7 for the industry. However, considering the fact that Ellie Mae has a 1-year return on equity of 16.8%, which is well above the 4.5% of its peers; there appears to be further upside to the shares.

6-Month Chart

Ellie Mae competes with tech behemoths such as Microsoft Corp. (MSFT), Oracle Corp. (ORCL) and Fiserv Inc. (FISV) in the mortgage-solutions arena. However, its shares have traded at a premium to its rivals.

The significant increase in the stock price in recent months was on account of encouraging sales trends and market share gains. The stock is currently above its 50 and 200-day moving averages of 18.94 and 13.15, respectively.

Trading volumes are considerably lower than its peers.

Founded in 1997, California-based Ellie Mae is a provider of end-to-end business automation solutions for residential mortgage purposes. Mid-sized mortgage banks, mortgage brokers, and credit unions cater to Ellie's flagship solutions to expedite mortgage processing. The solution facilitates error-free and regulatory compliant documentation, which speeds up origination and funding of new mortgages.

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