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Ellie Mae Expects a Strong Finish to 2017

The state of the housing market has been quite healthy for years, with the recovery from the financial crisis helping to lift home prices back toward precrisis levels in many markets and spurring a new wave of homebuying interest. Ellie Mae (NYSE: ELLI) has sought to help mortgage lenders be as efficient as possible with their operations, and the strong growth in mortgage volume made the company's platforms a must-have among growing home lenders. In 2017, fears have finally arisen that higher rates could stem future growth in mortgage volumes, and that has investors looking more closely at Ellie Mae to see if it can sustain its success.

Coming into Thursday's third-quarter financial report, Ellie Mae investors were prepared for further declines in key financial metrics like they saw last quarter, but they still wanted to see signs of an eventual recovery. Ellie Mae's numbers were better than many had expected, and it seems optimistic about its long-term potential. Let's take a closer look at Ellie Mae to see what its latest news means for its shareholders.

Image source: Ellie Mae.

Ellie Mae gets some help

Ellie Mae's third-quarter results showed signs of recovery. Revenue was up 7% to $107 million, which was better than the consensus forecast for top-line growth of just 5%. Adjusted net income was down 6% to $18.8 million, but the resulting $0.53 per share in adjusted earnings easily topped the more pessimistic $0.40 per share that most of those following the stock had expected to see.

Ellie Mae said that the hurricanes during the quarter had a clear negative effect on its business. The company brought in seat bookings of 8,100 during the period, but that was down from 9,600 in the second quarter.

Yet even more troubling was the fact that internal costs at Ellie Mae grew substantially. Costs of revenues grew faster than the company's top line, leading to an actual year-over-year decline in gross profit. Higher spending on sales and marketing, research and development, and general overhead costs sent operating income down by more than 15%. The only thing that helped Ellie Mae avoid a steeper year-over-year decline in profit was a substantial reduction in what the company owed for income taxes.

Still, CEO Jonathan Corr seemed comfortable with the company's performance. "We delivered strong third quarter results," Corr said, "with better than expected revenue and adjusted EBITDA." The CEO noted that "some of our customers were affected by devastating hurricanes in two of our major markets" in explaining some of the headwinds that the company faced.

What's next for Ellie Mae?

Ellie Mae is particularly pleased with the acquisition that it just completed. Earlier in October, the company closed on its deal to buy sales acceleration software platform provider Velocify. The deal should give Ellie Mae an opportunity to move toward automating the mortgage process fully, which is a key strategic goal for the technology provider. In conjunction with its existing Encompass platform, Ellie Mae hopes that integrating greater capabilities will spur more customers to begin and deepen relationships with the company.

The mortgage software specialist also boosted its guidance somewhat, making up for the cuts it made last quarter. Ellie Mae now believes that sales for 2017 will be between $411 million and $413 million, up from a $400 million to $405 million range three months ago. Adjusted earnings of $1.47 to $1.56 per share is as much as $0.40 higher than the guidance it gave back in July, although it only marked a partial restoration compared to what Ellie Mae had expected earlier in 2017. For the fourth quarter, Ellie Mae sees revenue of between $107 million and $109 million, and that should lead to adjusted earnings of $0.19 to $0.29 per share. The revenue figure is higher than the consensus forecast among investors, but earnings that low would be below expectations for Ellie Mae.

Shareholders didn't immediately react to the news, and the stock was initially unchanged in after-hours trading following the announcement. With the stock already having regained some of its lost ground after the July disappointment, Ellie Mae needs to sustain the hopes of its investors by pointing the way toward capitalizing on the growth opportunities it still has.

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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.