Ladies and gentlemen, thank you for standing by, and welcome to the Ellie Mae, Inc. Fourth Quarter 2012 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for your questions. (Operator Instructions) Today’s conference is being recorded, February 14, 2013.
I would now like to turn the conference over to our host, Lisa Laukkanen with The Blueshirt Group. Please go ahead.
Lisa Laukkanen - Investor Relations, The Blueshirt Group
Good afternoon and thank you for joining us on today’s conference call to discuss Ellie Mae’s fourth quarter and fiscal year 2012 results. 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 at elliemae.com.
On today’s call are Sig Anderman, Chief Executive Officer; Jonathan Corr, President and Chief Operating Officer; and Ed Luce, 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 future financial performance of the company. We wish to caution you that such statements are simply predictions and actual events or results may differ materially. We refer you to the documents that the company files from time-to-time with the Securities and Exchange Commission, specifically the company’s Form 10-K and 10-Q. These documents identify important factors that 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 will find supplemental data in the company’s press release, which includes reconciliations of the non-GAAP measures to the comparable GAAP results.
Now, I’d like to turn the call over to Ellie Mae’s CEO, Sig Anderman.
Sig Anderman - Chief Executive Officer
Well, thank you, Lisa and welcome everyone to today’s earnings call. First, I want to wish you all a Happy Valentine’s Day and keeping with the spirit of the day, I think you will love today’s update. This afternoon, I will talk about the business highlights for the fourth quarter and the full year 2012 and share some of our thoughts about the prospects for the mortgage industry in general and our business, in particular, and then Ed will review the details of our financial results. After that, we’ll answer any questions you may have.
The fourth quarter was an outstanding quarter that capped an outstanding year for Ellie Mae. We had record revenues $30 million compared to $19 million in Q4 of 2011, a 60% year-over-year increase. Profitability also increased significantly with adjusted net income of $7.6 million, almost three times what it was a year ago. Equally impressive was the addition of a record number of new Encompass users for the quarter and for the whole year. At the end of 2012, we had 74,000 active users of Encompass, up almost 40% from 2011. And in the fourth quarter alone, we booked 9,000 new SaaS user seats, setting a new sales record. And we have a very healthy sales pipeline and terrific momentum going into the New Year.
Our ability to maintain our sales momentum through the fourth quarter and into this year reflects several things that I’d like to share with you. First, the mortgage lending business is very robust nowadays. Current estimates are that $1.9 trillion in new loans were funded in 2012, way beyond the trillion dollars predicted at the beginning of 2012 by Fannie Mae, Freddie Mac, and the Mortgage Bankers Association. And many of our customers and prospects are reporting record mortgage volumes today, but they are being pummeled by never ending cascade of regulations, audits, and investor demands.
Jumping through the compliance hoops is very challenging, but they must jump through them. Every quarter is constant changes and analyses, operational processes, forms, and disclosures, and they must jump through every one of the hoops. There is no choice. If they try to do things manually, it stalls the process and breaks the bank, so they need automation technology to remain compliant and efficient at the same time. And that’s where we come in. Our technology helps lenders deliver documents to borrowers that are compliant. It helps them sell loans to investors that meet investor and regulatory standards and helps to make sure that business rules are followed throughout their organizations.
Our compliance functionality is built right into our Encompass enterprise software. The value of that, of compliance extending the full breadth of mortgage technology cannot be overstated. We believe we have the most comprehensive technology in the marketplace to do these things, and our sales show that lenders agree with us as Encompass has been selected over competitive solutions that require cobbling together two or three or more vendor solutions with all the risks and effort that’s added to the process.
Second, as we add customers, size itself is also a distinct competitive advantage. In the mortgage operation software business, bigger is really better and let me explain that. The unending profusion of regulations puts enormous strain on lenders and on lender software providers, providers like us. Unless the vendor can and is willing to devote considerable resources to continually upgrading software to help customers address these unending regulatory changes, they cannot satisfy customers’ needs.
Last year alone, we spent $18 million upgrading our software platform and we have to spend that in order to help lenders deal with regulatory changes and the increasing complexity of the lending business. I don’t think any of our competitors have the resources or commitment to come close to what we are doing.
Third as volume increases, the mega banks usually don’t flex to add to their retail channels. Instead, they rely on buying loans from independent and regional lenders like our customers. So, more hires are made in our universe of lenders. And finally, our larger customers are themselves getting bigger. The dynamics of the marketplace are helping them grow, investors require more capital of lenders, loan offices require a more services, borrowers and realtors who refer business demand a better experience like electronic document managements, BDO funding and less hassle. And our Encompass software helps them do those things and do them better, we believe, than competitive offerings. So our lenders attract more new loan officers and are taking business away from smaller lenders and from mortgage brokers while they are just buying them up.
And some of our lender customers are also expanding their business operations to add a new channel to themselves aggregate loans from other smaller originators. And as they do that, they add users and add more volume. As they add more users and volume, our revenues from those customers increase without any added sales expense on our part. We expect that this trend, our customer is getting bigger and adding seats will continue.
So in that context, let’s look at our 9,000 new seat bookings for Q4 of last year. Included in this total were 3,000 seats at lenders brand new to us who switched from competitive operating systems. This has more than doubled the results in this category of any of the first three quarters of 2012. The other 6,000 seats we added in Q4 fell into two categories. Some were mortgage professionals already using licensed versions of our software Encompass or DataTrac, who chose to upgrade to our SaaS offering. The rest of the seats booked were user additions at our existing customers. Our sales performance in Q4 is a confirmation of the strategy we announced during previous earnings calls that we were going to accelerate SaaS user growth by expanding our new customer acquisition team, our strategy designed to capitalize on current market conditions and leverage our competitive advantages.
Over the last couple of quarters, we added ten individuals to our new customer acquisition team, we now have a total of 20 and the new hires are starting to gain traction. With that, over 30,000 users still on the Encompass self-posted licensed versions of Encompass and more than two-thirds of our DataTrac users still left to migrate to our SaaS platform, we continue to see good runway for conversions. And we see equally good opportunity to add users brand new to Elli Mae. We believe based on data of the Bureau of Labor Statistics that there are about 190,000 mortgage professionals in our universe, individuals working for non-mega bank lenders. We will continue to keep the pedal to the metal to expose these not yet Encompass users to our robust solutions and bring them into the fold.
Now, let me turn to the second driver of growth, revenue per user. There are few components of that that impact that category. One, the type of software a user has. SaaS generates more revenue per user than perpetual licensing, because it delivers much more value and customers are willing to pay more for it. In addition, as our customers offer supplemental on-demand software such as our product and pricing engine and income verification tool, we generate additional revenues as well. These are functionalities the lender must use to originate loans and by encouraging our customers to use these through the Encompass platform, we can help offer the lender greater efficiency and cost savings, and at the same time continue to drive additional revenue per user. It’s really a win-win.
Revenue per user is also driven by network transactions. These are the transactions conducted by lenders over the Ellie Mae network, ordering things like credit, flood, title and appraisal reports from participating vendors and many other services, which they order for which those vendors pay us transaction fees. Our grand vision is that some day, some day lenders will order all these dozen or so services and get all orders fulfilled completely electronically over our network. Right now, an average of six of those services are ordered over our network. That has increased from about five a year ago. Adoption is slow, but steady but efficiency is pushing lenders and providers alike toward full automation.
Our Total Quality Loan program is another contributor to our revenue per user. The Total Quality Loan program applies best practices to loan origination. It is the holy grail of automation that some day all the necessary verifications will be undertaken by the lender electronically on every loan in a way that everyone else in the value chain, investor, servicers, securitizers trust the process, and no step will have to be repeated ever by anyone else in the value chain. As many of you know, this was developed by us in collaboration with some of the nation’s leading investors and the first and limited version was introduced last year by Wells Fargo to some of their correspondent lenders.
As it turns out, when a lender embraces the Total Quality Loan concept, they usually use the same best practices for all the loans they originate and not just for those being delivered to Wells Fargo. So, they are also utilizing more of our supplemental on-demand services that comprise the TQL process thereby producing a better loan and generating revenue for Ellie Mae both on loan submissions to the participating investor and from the various services required to make a loan meet the Total Quality Loan requirements.
Currently, two of the top mega lender investors, Wells Fargo and CitiMortgage are participating in the Total Quality Loan program on the investor side and we are pleased with the progress thus far. Wells Fargo has continued to rollout the program to our joint customers, and in December, we launched a Total Quality Loan pilot with CitiMortgage within its correspondent lending channel. And we continue to see strong interest in TQL from other investors. While we are at the early stages of adoption of Total Quality Loan initiative, we remain quite enthusiastic about the long-term potential for this initiative. We expect to see about a $5 million revenue contribution from TQL in 2013.
I suspect many of you will recognize the underpinnings of our 2012 performance. First and foremost, we focus on expanding our user base of lenders who install Encompass as their core enterprise operating system. We now have 74,000 Encompass users. Then, in a land and expand strategy, we identify all those additional functions and tasks that they automate or should be automating and then expand our software functionality and increase network usage as well. It makes our customers’ lives easier and steadily increases our revenue per user until we approach what we believe to be a $2 billion to $3 billion total addressable market.
In light of the almost 40% increase in our user base and nearly doubling of our revenues, we have undertaken a number of initiatives to support our growth and accommodate our expanding user base. In 2012, we completely redesigned and upgraded all of our data centers to significantly increase capacity and the reliability of our on-demand offerings. We added to our research and development and SaaS teams and expanded our implementation and customer support teams to handle the 40% increase in new Encompass subscribers and the expected growth in users over the next few years. And in November, we recruited software marketing veteran Susan Chenoweth Scarth as Senior Vice President of Marketing. Susan is a high-tech marketing executive with a record of developing leading brands and generating revenues for high growth global technology companies including Jigsaw, Taleo and Microsoft. With these expanded resources, we believe we have a solid foundation in place for continued growth.
As we enter 2013, we remain very encouraged by a number of positive signs in the real estate and mortgage industries as well as dynamics across our customer base. We’re seeing a steady stream of robust housing data and growing the evidence of the housing recovery. Continued low interest rate, increasing home affordability, improved loan-to-value ratios and better consumer sentiment all add optimism to the industry outlook.
Let me briefly address the new and anticipated regulations that are very much in the news these days. Our number of new regulations driven by Dodd-Frank and regulated by the Consumer Financial Protection Bureau will be put in place between now and throughout 2014 and 2015. Regulations including the qualified mortgage, loan officer compensation, the high cost rules, emerging of RESPA, the Real Estate Settlements and Procedures Act and truth in lending disclosures. Some people feel that this would be the most challenging of regulations yet. While these regulations will require significant changes to lending processes and mortgage technology, the industry is projecting minimal volume impact as almost all loans are currently being written within the proposed standards.
According to industry sources, 95% to 98% of loans in 2012 would have fallen under the qualified mortgage definition. At the same time, our offerings become even more attractive when mortgage companies base increasing regulatory demands because once again our customers will be relying on us to help them jump through the hoops. Our compliance capabilities, our ability and our commitment to upgrade software to reflect changing regulatory requirements in a timely manner, our financial resources and our experienced team together give us a terrific competitive advantage, which we believe will provide significant long-term growth opportunities for Ellie Mae.
The current blended mortgage origination volume forecast predicts a 17% downturn in 2013 from 2012. We remain confident in our ability to grow quite nicely even in the face of that headwind. As we have done in the past, while about half of our revenue has some sensitivity to origination volume, we are confident we can more than make up for that by expanding SaaS to our SaaS user base and increasing revenue per user. And while we do use the blended origination forecast in our models, a number of other external data points suggest potential upside to these national forecast numbers. For example, Barclays’ consumer finance team has projected $1.9 trillion in originations for 2013, basically flat to 2012 are based in part on the projected continuation of low rates driven by the Fed’s monthly buying of treasuries and mortgage-backed securities.
In addition, CoreLogic data suggests that continued signs of home price appreciation might enable many of the 69% of homeowners with rates above 5% to refinance into current historically low rates. In summary, I’m very pleased with our strong performance in 2012 but I feel even better about the future. We are on a role and we have laid the foundation to sustain our growth through the acquisition of new users and the upgrade of Encompass and DataTrac licensed users to our SaaS offering and through increased adoption of additional on-demand solutions, both those currently in our product mix and those to be added in the future. We believe our technology leadership scale and commitment to compliance, excellence provide significant strategic advantages. We are confident these competencies combined with our company’s strong cash flow will create significant long-term value for our stakeholders.
Now, before I turn things over to Ed, I’d like to add one more thing. We announced today that Jonathan Corr has been named President of Ellie Mae. Going forward, Jonathan will be responsible for all of the day-to-day operations of the company. When I hired Jonathan almost 11 years ago to head up our product strategy effort, I figured he was a winner. He is a graduate of Columbia with an engineering degree, a Stanford MBA with experience in product strategy at both PeopleSoft and Kana Software. Now, 11 years later, he has proven himself a superstar, not just because Mortgage Banking magazine named him an IT All-Star in 2007, but because he has been a central figure in Ellie Mae’s growth. He was our point man in the concept and creation of Encompass itself, our strong advocate for our SaaS strategy, and he has worked closely with me to complete and successfully integrate our major acquisitions, including DataTrac and Mavent. Most of you have met Jonathan over the years, and I know agree with me that he is a perfect candidate to take over day-to-day operations of our company.
Although I am giving up one of my titles and operating responsibility, I intend to remain very much involved in growing our company as full-time CEO and Chairman of the Board. Jonathan and Ed will continue to report to me as I focus on our long-term growth strategy, new corporate and client initiatives, and potential acquisitions.
With that, I’d like to turn the call over to our Chief Financial Officer, Ed Luce to discuss our results in more detail. Ed?
Ed Luce - Chief Financial Officer
Thank you, Sig. Good afternoon and thanks again to everyone joining us today on our earnings call for the fourth quarter and fiscal year 2012. We are pleased to report another very strong quarter.
As Sig mentioned, our results continued to be driven primarily by the adoption of our on-demand SaaS Encompass solutions. With over 41,000 active SaaS users and almost 74,000 active Encompass users in total, we had a 60% increase in total revenues for the fourth quarter to $29.9 million compared to $18.8 million in the fourth quarter of 2011.
Revenue per active Encompass user increased 17% year-over-year to $414 for Q4 and a 48% for the full year to $1,592. Revenue per active SaaS Encompass user increased 22% year-over-year to $388 for Q4 and 41% for the year to $1,444. As a reminder, this metric can fluctuate quarter-to-quarter based on how many new users we activate during a period. If we activate a high number of users during the quarter, this can impact the revenue per user number temporarily as those users ramp.
On-demand revenue, which includes the SaaS and success-based pricing version of Encompass, our document preparation, compliance, and product and pricing services and transaction revenues from the Ellie Mae network increased 70% to $26.6 million compared to $15.6 million in Q4 of 2011. This increase was largely a result of the addition of on-demand Encompass SaaS customers and increased usage of our services by our existing user base.
On-premise revenue, which primarily includes legacy licensed software products and maintenance fees, was $3.4 million for the fourth quarter, a 7% increase from $3.1 million in the prior year period. This increase was due primarily to additional seats purchased by legacy self-hosted clients and by DataTrac client maintenance renewals since the acquisition in Q3 of 2011.
Cost of revenues for the fourth quarter was 22% of revenue or $6.5 million compared to 26% of revenue or $4.9 million in the prior year period. The increase in absolute dollars was due primarily to staff added in implementation, professional services, customer support, datacenter operations, and third-party royalties supporting the higher sales of the 4506-T income verification product. Gross margin for the quarter was 78% compared to 74% in the fourth quarter of last year. The increase from the prior-year period was primarily the result of our ability to utilize existing infrastructure to accommodate the revenue growth and the fixed nature of certain costs such as depreciation, amortization, and core headcount on those areas.
Sales and marketing expenses for Q4 of 2012 totaled 18% of revenue or $5.3 million compared to 22% of revenue or $4.1 million in the prior-year period. The dollar increase was due to higher sales commissions, our user summit held in October and an increase in sales staff over the prior period which Sig described earlier. R&D expenses for the fourth quarter were 16% of revenue or $4.9 million compared to 22% of revenue or $4.1 million in the prior year period. The dollar increase was due to the addition of new development staff, our additional investment in operations, new product development and integrations and an increase in stock-based compensation in the quarter.
General and administrative expenses for the fourth quarter were 25% of revenue or $7.4 million, compared to 20% of revenue or $3.8 million in the prior-year period. The dollar increase was due to an increase in the stock-based compensation and consulting fees related to public company projects.
Income from operations for the fourth quarter for the fourth quarter was $5.8 million or 19% of revenue compared to income from operations of $1.8 million for the prior-year period. And net income for the fourth quarter of 2012 was $4 million or $0.14 per diluted share compared to net income of $1.8 million or $0.08 per diluted share in the fourth quarter of 2011.
Going forward in 2013, we expect our GAAP tax rate to be approximately 38%. On a non-GAAP basis, adjusted net income for the fourth quarter of 2012 was $7.6 million or $0.27 per diluted share compared to adjusted net of $2.8 million or $0.13 per diluted share in the fourth quarter of 2011. Adjusted EBITDA for the fourth quarter was $10.3 million compared to adjusted EBITDA of $3.4 million for the fourth quarter of 2011.
And now turning to our results for the full year 2012, for the year we had an 84% increased in total revenue to $101.8 million compared to $55.5 million in 2011. On-demand revenue increased 89% to $88.8 million compared to $46.9 million in 2011. And on-premise revenue for the year increased 52% to $13.1 million compared to $8.6 million in 2011. Gross margins for the full year were 77% compared to 72% for 2011. Net income for the full year 2012 was $19.5 million or $0.76 per diluted share compared to $3.6 million or $0.18 per diluted share in 2011.
On a non-GAAP basis, adjusted net income for the full year 2012 was $27.9 million or $1.09 per diluted share compared to $4.9 million or $0.24 per diluted share for the full year 2011. And adjusted EBITDA for 2012 was $32.8 million compared to $6.6 million in 2011. As of December 31, 2012 we had cash and investments totaling $104.1 million. Free cash flow was $8.6 million in the fourth quarter and $19.6 million for the year. Fourth quarter diluted shares outstanding were 27.9 million and 25.5 million for the year. The higher number of shares outstanding is due to the follow-on offering we completed back in July of 2012 in which we sold approximately 3.5 million shares.
CapEx spend for the year was $8.1 million or 8% of revenues. Most of this investment was in the datacenter infrastructure and hosting environment, we believe these investments will enable Ellie Mae to scale meaningfully on the years ahead as we continue to provision additional clients seats on our hosted platform and process a greater volume of transactions across our network.
For 2013, we expect our CapEx spend to be approximately $6 million or 5% of revenues. For the year, our higher operating expense levels in 2012 were primarily due to the cost of our October user summit, aggressive hiring to increase our sales force implementation and customer support teams as Sig noted, as well as higher stock-based compensation expense.
Now, let’s turn to the guidance. Our 2013 annual guidance takes into consideration industry forecast for 2013 mortgage origination volumes. Three national organizations publish monthly updates of their annual and quarterly forecast. The composite forecast of Fannie Mae, Freddie Mac, and the Mortgage Bankers Association for 2013 mortgage origination volume is currently $1.6 trillion, which represents a 17% decline in mortgage volumes from 2012.
The current composite quarterly forecast for 2013 origination volume is as follows: Q1, $461 billion, Q2, $438 billion, Q3, $357 billion, and Q4, $298 billion. Since about half of our revenue has some sensitivity to volumes, we are providing financial guidance for the first quarter and the full year of 2013 based in part on this forecast. Against this backdrop, we expect revenue in the first quarter of 2013 in the range of $30 million to $30.5 million. Net income for the first quarter is expected to be in the range of $3.2 million to $3.5 million or $0.11 to $0.13 per diluted share. Adjusted net income is expected to be in the range of $6.4 million to $6.8 million or $0.23 to $0.24 per diluted share, and adjusted EBITDA is expected to be in the range of $9.5 million to $10 million.
For the full fiscal year 2013, revenue is expected to be in the range of $127.5 million to $129 million. Net income is expected to be in the range of $15.6 million to $16.2 million or $0.55 to $0.57 per diluted share. Adjusted net income is expected to be in the range of $30.2 million to $31 million or a $1.06 to a $1.09 per diluted share. And finally, adjusted EBITDA is expected to be in the range of $44.2 million to $45.4 million for the year. As I mentioned, our CapEx is expected to total $6 million about 5% of revenues for the year. Net of this capital spend and net of a full tax rate of 38% for 2013, we expect to generate approximately $23 million in free cash flow during the year.
When working on your models and looking at year-over-year comparisons, I would like to remind everyone of a few key puts and takes in the calculation of earnings per share. First, our share count increased by approximately $3.5 million shares as a result of our follow-on offering in the third quarter of 2012. Second, stock-based comp is expected to increase almost twofold to approximately $13 million in 2013 due to our accelerated hiring and our performance-related grant programs. And finally, following our strong financial performance over the last two years, we released the tax valuation allowance associated with our net operating losses and are now at a full tax rate of 38% for 2013. This compares to 8% in 2012.
Lastly, before we turn to your questions, I would like to mention upcoming conference participation. We will be presenting at the William Blair Real Estate Summit in San Francisco on March 21st.
And now, we would like to open the line for questions, operator.
Thank you. Ladies and gentlemen, at this time we’ll begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Michael Huang with Needham & Company. Please go ahead.
Michael Huang - Needham & Company
Thanks very much. Good quarter guys. So, nice job on the new user growth in Q4, I was wondering when digging into that, was that benefited at all by seasonality or was that just more of a function of rents and sales account. And then how should we think about this metric trending kind of in Q1 beyond given the sales hedge you put in place? Thanks.
Great question, Michael, thanks for asking. It is really the results in Q4 are the results of the sales strategy we laid out there, starting to bring on new sales people in Q3 through Q4 into early this quarter and some of them really starting to hit stride in bringing those new user bookings as we said that the results for the quarter were almost 2.5 times any other previous quarter this year in terms of new user bookings, brand new customers. I expect to see some of the other folks that we brought on continue to ramp and we are aggressively driving the new customer acquisition targets as we go into this year.
Michael Huang - Needham & Company
Got you, okay. So, it not a – it wouldn’t be a surprise if Q1 actually turned out to be stronger than Q4 or was Q4 especially strong for any particular reason?
I think it was strong just as we had guys beginning to hit some traction. So, I would that we’re going to see some continued consistent performance as we go into 2013.
Michael Huang - Needham & Company
Great, okay and then my last question is, so as you look at – so this if for Ed. So, as you’re thinking about 2013 guidance and obviously bakes in some compression in industry volumes which might turn out to be conservative. But from your perspective, like what are the assumptions that – or what are the biggest risks to guidance in your view, like is it around industry volumes perhaps being worse than kind of the 17% or is it around sales productivity. Just walk us through what you think would be the biggest risk for 2013 guidance from your standpoint?
Mike, hi. It’s – in my mind, its execution. You’re right, we did bake in the 17% decline as it stood, as we put these numbers together and we have certainly, we certainly are aware as you are that there are a lot of components to this model that can grow despite volume swings. So, in my mind, we have to keep doing what we’re doing, adding more users and implementing them and getting them into a revenue generating mode as quickly as we can.
Michael Huang - Needham & Company
Thank you. Our next question comes from the line of Carter Malloy with Stephens. Please go ahead.
Carter Malloy - Stephens
Hey, guys congratulations and thanks for taking my questions. So, following up on the last question there and the impressive user growth overall, I want to look at the other side of it which is the 6,000 conversions and internal growth of seats. Can you tease apart those two drivers in terms of which was the greater or maybe an absolute number?
Carter, we really haven’t broken it out in the past, we may do that in the future. But really it’s a combination of both conversions and expansion of existing customers. And, again, as you look at the numbers, what you can see there is not only on the new customer growth did we blow things out, but in terms of both conversions and upgrades, Q4 was the strongest of any quarter this past year.
Carter Malloy - Stephens
No question there. And again, beating that same dead horse just curious relative to your guidance which was what’s conservative, did you guys plan to continue converting at that type of a rate going forward given almost an anomaly in terms of how good the additions were in the fourth quarter?
Yeah, I don’t know if we will continue doing 9,000 every quarter, but I would expect to see a continued improved pace from what the pace was in previous quarters especially around new customer acquisition. And we continue to see solid performance in terms of upgrades and conversions and seat adds. So, that’s what really been figured into our model.
Carter Malloy - Stephens
Okay, great. That’s helpful and congratulations again. Thanks.
Thank you. Our next question comes from the line of Brandon Dobell with William Blair. Please go ahead.
Brandon Dobell - William Blair
Thanks. Guys on the sales force side, should we expect that number which is now around 20 to keep going. If you see that in this kind of progress with the new users, would it make sense to add more people or do you think you got to scale to the right spot?
I think we are scaled to the right spot for the foreseeable future. Again, we started to see some really good results from the folks that we brought on in Q3. It takes a bit of time for sales guys to ramp.
Brandon Dobell - William Blair
We have got some new guys coming on board. And once we kind of get them to full performance we’ll reevaluate, but right now I think we have hired to what are our current plan is for the foreseeable future.
Brandon Dobell - William Blair
Okay. And then historically you guys have talked about like kind of a 6 to 9 month transition timeframe for converted users, is that still the right way to think about how that process works and then with the new user numbers should we think about the same kind of timeframe bring user on and two quarters later they are contributing to the revenue base or is it getting easier for you guys to convert those through?
Well, both of them are operating and seemed to be operating at the same pace, if not accelerating. Yeah, 6 plus months is about the right way to think about it, 6 to 9 months, 6 months or so before we see the results there. And that’s another reason we ask about the kind of the visibility and the risk in any of the – that the guidance we have given so much of what’s going to end up being in place that drives the revenue for 2013 has already happened.
Brandon Dobell - William Blair
It’s already been sold, and especially with such a strong Q4, which basically head us with comparable seats I think for 2012 for the full year in new customer ads, I think about close to about 7,000 compared to 2011 and I don’t see that’s slowing down. So, I think we are going to continue seeing that. That’s really going to contribute to the very end of this year, but really continue to drive performance in 2014.
Brandon Dobell - William Blair
Okay. And last question for me, you mentioned two-thirds of the DataTrac users is still left to migrate, I just want to make sure I get to migrate versus activate. I would assume you have activated or kind of converted people over at a greater percentage probably, I don’t know half or so of that user base, but that two-thirds number is that refers to people who are yet to get on kind of the revenue docket for you guys? Is that right or is it – have I got the definition wrong?
Yeah, let me say, so what we have got is about two-thirds of the available guys yet to sell.
Brandon Dobell - William Blair
On to the SaaS platform, right.
Brandon Dobell - William Blair
The first store that we have sold on to the SaaS platform are not – all of those guys are not deployed, I’d say probably maybe about half of that first third is now in that active use of bucket and half of that first third has been sold, but they are in implementation that will cascade as we go into 2013.
Brandon Dobell - William Blair
Does that make sense?
Brandon Dobell - William Blair
Yes, perfect and congrats on the new title. Well done.
Brandon Dobell - William Blair
Thank you. Our next question comes from the line of Brian Schwartz of Oppenheimer. Please go ahead.
Brian Schwartz - Oppenheimer
Yeah, hi, thanks for taking my questions, and congratulations too on the great bookings here and new customer adds in Q4. I had one question here for Ed and then I do have a strategic question for Jonathan. So, for Ed just following up on Michael’s question earlier and I think you’ve heard a couple questions here on just the visibility into the guidance that you have here into the numbers. And then I think it’s important, because there is certain way, there is the bear thesis out there that because of these mortgage volume trends that you guys were not going to be able to make your earnings numbers here for 2013, but yet here you are, you are raising them by 15% above what the Street was thinking. So, can you help us at all, Ed in terms of talking about the visibility into these 2013 members? And do your assumptions do they include any potential new banks coming on board to the TQL program or maybe a step up from the sales force productivity that you saw in Q4, anything that you really could add in regard to the visibility into the 2013 guidance will be helpful? And then I have one follow-up for Jonathan.
Sure. Hi, Brian. Lot of components to that question, primarily let’s just address the visibility overall you think of it in a couple of ways. One, we have over 60% of our revenues now are on contract and what that means is either a success based pricing of contract, maintenance renewal contract, subscriptions, standalone products and so forth. Second piece there on the success based pricing that gives us a lot of visibility because we have over – well close to 40,000 users on these SaaS contracts and they’re all paying some sort of base fee. That’s a contracted fee. That’s again regardless of what kind of volumes are out there. So, we certainly have that visibility in our model and as you recall, those are two or three or four-year contracts in most cases.
For TQL, we do not have any new lenders baked into our guidance for TQL. We have the ones that Sig addressed, Wells and CitiMortgage. But if we haven’t signed them up at this point, we do not include them in the guidance. So overall, when I look at the different revenue buckets here, I feel very good about close to 90% of our revenues going forward several quarters as far as addressing the visibility question. And we also of course in our models, we factor in transaction histories with each client – with each lender client and that can be based – some of that is based on the volume movements and that’s where the 17% forecast, downward forecast in this case has a bit of an impact. Does that help answer the question?
Brian Schwartz - Oppenheimer
Yeah, it certainly does. Thank you. I think that was real helpful. And then, on the strategic question really over to Jonathan, just want to maybe tap into what you’re hearing out there in the fields out there in the market with your sales person, do you get the sense that a lot of the positive headlines that we’re starting to hear about the housing recovery it seems to be taken hold and what we’re seeing in your business results here, do you get the sense that the lenders out there in the mortgage businesses are incrementally starting to come off the fence here and looking to update their technology and invest in new technology as they get the sense that the demand is starting to come back for their industry and adding headcount to.
And then as we think about the opportunity for your business, how we should we think about the platform opportunity here in the future. If you look at your cash balance now, you are over $100 million, you have got no debt, you’re throwing off 35% EBITDA margin and you’re guiding to $23 million in free cash flow. So, your business has throwing off a lot of cash. Do you think that there is an opportunity here over the next 12 to 24 months if the industry is starting to look to update and refresh technology for your business to either innovate internally with your R&D by bringing to market new services, new products or potentially tapping your cash generation capabilities and acquire a new product or new service to maybe speed up that opportunity? Thanks for taking my questions.
Thanks Brian. Lot of pieces there as well, we always get these big compound questions. So definitely, what we are seeing out there in the market both with our own customers and prospects is a real continued sense of optimism and bullishness is better way to put it. I mean I talk to customers and the purchase market is heating up in a lot of marketplaces and every time I talk to a lender asking what they think 2013 is going to look like, I am hearing as good, if not better.
That’s I think the ground level from what the lenders are saying in terms of business are our customers and the profile of customer we go after. In addition to that, we are seeing a lot of activity in terms of prospects really driven by the fact that they now have a sense at least in the first shoe dropping, some of these major changes that are going to come out of – that’s come out of Dodd-Frank and that will be enforced by the Consumer Financial Protection Bureau. They know some of these things are going to be very significant for them in 2014. They also realize that the bigger shoe is going to drop the second half of this year on some major changes to process and disclosure that will hit at the end of ‘14 and the beginning of 2015. And so what we see again the number one concern of these customers is compliance, regulatory change, and they are extremely keen on making sure they have the right partner that has the wherewithal, the resources, and the commitment in the mortgage origination space to make them successful and do the heavy lifting, so just a tremendous amount. We are running campaigns regularly. We are just doing a campaign or compliance webinar and we got thousands of folks that registered for it in the next couple of days, so just it’s tremendous.
The platform question, again I think Sig alluded a bit to this into I think talking about just the fact that on a number of avenues, we just continue to see your various services across the network, continuing to see adoption as people embrace automation, because they have to, they have to – to be able to stay profitable as more and more challenges are thrown their way, but also because they want visibility and they want control. And so we have seen it go from four, two years ago, to five last year to six at the end of Q4. We continue as part of our strategy as we have said there are a number of different services that our customers use that we don’t provide right now and that will fall into a bucket of things all the way from more capabilities for consumers to do self-service during the process. And you can see more and more consumers using obviously mobile devices, whether it be phones or tablets, we see more and more of our customers using other types of customer relationship management capabilities. These are clearly areas for us to do a combination of investing and/or partnering and/or acquiring and that has been our stated strategy and I clearly – those are things we continually look at and some of the things that we will be looking at both internally as well as externally in terms of opportunities over the next 12 to 18 months.
Thank you. Our next question comes from the line of Raghavan Sarathy with Dougherty & Company. Please go ahead.
Raghavan Sarathy - Dougherty & Company
Good afternoon and thanks for taking my questions. The first question is for Jonathan sort of clarification question, so the new user seats stepped up meaningfully in the fourth quarter, and you are also adding more sales people here to the first quarter. Is that a reason to believe that we shouldn’t expect the meaningful step up from roughly 7,000 you added last year in terms of new users?
So, I make sure I follow that, so you’re asking – so, we had 7,000 new users, new customer seats last year. I would expect that, that number is going to rise up and to the right. That most of last year was a function of about a team of 10 folks with some productivity towards the last half of the year of some new folks, that team has expanded materially. They are not all firing on all pistons. It takes salespeople a little while to ramp, but we expect to see a continued improvement and performance in that area, because we wouldn’t be hiring more sales people if we didn’t think we could sell more seats.
Thank you. Our next question comes from the line of Chris Hogan with Barclays. Please go ahead.
Chris Hogan - Barclays
Hey, guys. Yeah, thanks for taking my questions and great quarter. I just wanted to talk a little bit about that 190,000 user number or potential user number that Sig stated on the call. I mean, is there – is the percentage of that more difficult to win compared to the other. I mean, is a certain percentage of that still greenfield versus some that’s really – there is a viable competitor in there or how do you guys think about kind of the competition that – or the composition of that remaining piece?
So, there is very little greenfield. There are lenders that pop up now and then and the benefit of being the largest share player is that when new companies pop up many times, they’re coming from companies that already have Encompass or that’s one of the first thing they look at. But in general, we are competing with incumbent solutions. Many of them legacy disconnected pieces that just can’t hold a candle to what we believe is the most comprehensive solution and the most robust solution from a compliance and regulatory standpoint.
And so, we are competing with incumbents, but we win the majority of the time, and these incumbents, most of them are smaller private companies that just don’t have the resources that we have. Their revenues usually are either even less the amount of R&D that we’re spending, probably half. And in the case of some of these public players that have bought small players, whether they can focus and execute effectively in the origination space, I mean they have a lot of things under their portfolio, if you will, a lot of different priorities pulling their attention. We are completely focused on this area. We are the biggest player focused on this area and we’re the leader and we’re the leader and so we continue to see just fantastic results.
Thank you. Our next question comes from the line of Brad Sills with Maxim Group. Please go ahead.
Brad Sills - Maxim Group
Hey guys, thanks for taking my question. Just one on the TQL program, how did you see the ramp, in the pilot programs within the mega-lenders this quarter?
We continue to see it moving at a similar pace that what we have seen in the past, Citi just really started in their pilot, as we mentioned and that’s, we typically expect that in last a couple of quarters as what we have seen in the past but as Ed or Sig both mentioned, our expectations based on what we saw last year coming into the end of the year and what we are seeing in terms of pace this year as we expect to see a nice contribution about $5 million in revenue from that and continued momentum there.
Thank you. Our next question comes from the line of Pat Walravens with JMP. Please go ahead. Mr. Walravens, your line is open.
Pat Walravens - JMP
Thank you. Jonathan, what would you say, your market share was in Q4 and where do you think that can go in 2013 and 2014, if you look at it as a percentage of loan origination?
So, loan origination is a tough one. What I will look at is we dig a number there about 190,000 potential folks based on taking out the mega-lenders and kind of that’s what our universe is. We’re at about 74,000 so that’s shy of 40%. I don’t see any reason we can’t keep executing like we’re executing. There is a lot of shares still out there and I think we’re a long way from any type of saturation.
Thank you. At this time, I would like to turn the conference back to management for any final remarks.
Sig Anderman - Chief Executive Officer
Well, thank you all for joining us in today’s call. We appreciate it and remember to bring that bouquet of flowers home tonight.
Ladies and gentlemen, this concludes our conference for today. If you would like to listen to a replay of today’s conference you may do so by dialing 1-800-406-7325 or 303-590-3030 and entering the access code of 4593741#. Thank you for your participation. You may now disconnect.
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