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Ellie Mae Inc. (NYSE:ELLI)

Q4 2013 Earnings Conference Call

February 13, 2014 04:30 PM ET

Executives

Ellen Davis – The Blueshirt Group

Sig Anderman – Chairman and Chief Executive Officer

Edgar A. Luce – Executive Vice President-Finance and Administration and Chief Financial Officer

Jonathan H. Corr – President and Chief Operating Officer

Analysts

Koji P. Ikeda – Oppenheimer & Co., Inc.

Brad H. Sills – Maxim Group LLC

Chris Hogan – Barclays Capital, Inc.

Michael Huang – Needham & Company

Samad Samana – FBR Capital Markets & Co

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Ellie Mae, Inc. Fourth Quarter 2013 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 questions. (Operator Instructions). This conference is being recorded today, February 13, 2014.

I would now like to turn the conference over to our host Ellen Davis with The Blueshirt Group. Please go ahead ma’am.

Ellen Davis

Thank you, operator. Good afternoon and thank you for joining us on today’s conference call to discuss Ellie Mae’s full year and fourth quarter 2013 results. This call is being broadcast live over the web and can be accessed for 90 days on the Investor Relations section of Ellie Mae’s website at www.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 the 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 Forms 10-K and 10-Q. These documents identify important factors that could cause the 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, please go ahead.

Sig Anderman

Well, thank you Ellen, and thank you all for joining us today. This afternoon I will talk about the business highlights and then Ed will review the details of our financial results. After that, we will answer any questions you may have.

I’m pleased to report strong operating results for 2013. Results that are especially gratifying given the continued downturn in national mortgage origination volume.

Revenues for 2013 were up 26% to a record $128.5 million, even as national mortgage volume declined 14% from 2012. Adjusted EBITDA grew 20% to $39.4 million. Our revenue growth is driven largely by a successful strategy to aggressively pursue market share even in the face of the downward cycle in the mortgage industry. We knew 2013 will be a challenging year for lenders with volume down and new regulations pressing their operations at every level and we also knew that our Encompass solution was built precisely to help those lenders comply with ever changing rules of the game and create efficiencies that would be especially attractive as volumes decline.

So a year ago, we spoke about building up our sales and client support teams. We went ahead and doubled our Greenfield sales team and expanded our market and client support teams, and the strategy is working. We booked over 39,000 new Encompasses in 2013, 60% includes the last year, up from 25,000 last year. 9,800 of those seats were booked in the fourth quarter alone and of those, 6,500 were with new customers, the highest new customer acquisition quarter in our history.

Most of these seats have not yet become active and we still ended up the year with 92,000 active Encompass users, a 25% increase over 2012 and we grew active SaaS users by 54% to 64,000. These new Encompass users and book seats provide a terrific foundation for growth in 2014 and beyond.

At the same time, we are expanding the audience for our product as you can see that it generate interest from some of the largest lenders in America. Lenders like Ditech, a win we announced last quarter. We are very pleased with the progress we’ve made in penetrating the top mortgage originators in the country with six of the top 25 and two of the top 10 using our solution to originate and fund their mortgages. We believe this speaks to the scalability and demand for our end-to-end solution. I’m convinced that every lender in America, every one of them can benefit from our automation software. Going into the first quarter, we have a healthy backlog of customers and implementation following the year of outstanding bookings. And we have a robust pipeline of sales opportunities. We generated over $32 million in cash last year.

And want to take advantage of our strong cash position to continue this aggressive strategy in 2014, especially while we believe most of our competitors are tightening their doubts. We will press the market share growth again this year and are continuing to expand our marketing and sales effects as well as our implementation and customer support functions. These teams configure Encompass for our new users, get them on board, provide any required professional services and help them utilize our software affectively to get the most out of our offerings.

I’d like to turn for a moment to our total quality loan program. And we introduced this program several quarters ago after working with large investors such as Wells Fargo and CitiMortgage as a way to increase quality and speed up the process of loan delivery to these investors from their correspondence or clients. Over the course of the last year the program was evolved as many lenders, who adopted it at the request of a specific investor found that they wanted to systematize and put rules on them the processing of all their loans.

They ended up using TQL and TQL rules and services to process every one of their loans, no matter who really were selling them to and regardless of whether the loans are directed to investors on the TQL program like Wells or Citi not to any other investor. But even if lenders don’t intend to sell their loans at all that instead retain them in their loan portfolio. So over the past year working with many of our top lender clients, we expanded TQL to include streamlined workflows, processing rules and easy way to trigger ordering and the settlement services needed to fund a loan.

To expand the TQL results in much more efficient loan processing and because of the higher quality of the loans, faster purchase by investors, and therefore quicker turnover of a lenders’ warehouse line. The reception among our lender customers has been very promising. We also pulled it into the TQL fabric and built into the Encompass software, workflows and automation tools that allow lenders to more easily comply with the new regulations that became effective last month.

The ability to repay on the qualified mortgage rules, this makes the TQL program even more relevant for our lenders. And as our customers run checks and validations throughout process, we generate income on the white label services we provide along the way. We are evaluating expanding the services in the TQL programs, include additional verifications. At the same time we continue to add investors who will be promoting TQL to their specify correspondences. It is a classic, push pull strategy.

Since our last earnings call, two more large investors agree to participate in TQL, Stonegate and PHH. We believe the push/pull strategy, pushed by the lenders and pulled by the investors will help to make our TQL Program a best practices format for the mortgage lending industry.

Of course, we continue on the path to automating everything else that is automatable. We closed our acquisition of MortgageCEO at CRM and marketing automation service last month. We began selling the CRM functionality to Encompass users in the first quarter.

We are focused on fully integrating the product and then expect to see real attraction in the second half of the year. This acquisition furthers our drive toward penetrating our $500 per loan totally addressable market.

We are excited about our prospects of 2014 with the increasing demands from quality, compliance and efficiency moving in confident to the long-term outlook that Ellie made and in our ability to continue to grow regardless of the volatility in the mortgage volume end, in fact in many ways actually helped by the volatility in the mortgage volume.

So with that, I will turn the call over to our CFO, Ed Luce to discuss our results in more detail. Ed?

Edgar A. Luce

Thank you, Sig. Good afternoon and thanks again to everyone joining us today. As you have seen by our press release this afternoon 2013 was another successful year for Ellie Mae. Our business model continues to demonstrate its unique combination of strong revenue growth with high operating and cash flow margins.

Our results continue to be driven primarily by the adoption of our on-demand SaaS Encompass solutions. We booked 39,000 new SaaS seats during the year and ended the year with over 95,000 SaaS seats under contract.

For 2013, we had 26% increase in total revenue to $128.5 million compared to $101.8 million in 2012. On-demand revenue increased 31% to $115.9 million compared to $88.8 million in 2012; this increase was largely result of the addition of new on-demand Encompass SaaS customers, the upgrades of existing customers to our SaaS platform, and greater adoption of our standalone products and services. On-premise revenue for the year decreased 4% to $12.5 million compared to $13.1 million in 2012 as our self hosted clients continue to migrate to the hosted SaaS version.

Gross margins for the full year were 75% compared to 77% for 2012; this as a result of our investment program related declines implementation support teams and data center expansion.

Net income for the full year 2013 was $12.6 million or $0.44 per diluted share compared to $19.5 million or $0.76 per diluted share in 2012. On a non-GAAP basis, adjusted net income for the full year of 2013 was $28.3 million or $0.99 per diluted share compared to $27.9 million or $1.9 per diluted share for the full year 2012 and adjusted EBITDA for 2013 was $39.4 million, 20% higher than the $32.8 million in 2012.

Turning to our results for the fourth quarter 2013, total revenue for the quarter was $30.4 million compared to $29.9 million for Q4 of 2012. Contracted revenue increased to 69% of total revenue for the quarter compared to 47% a year ago. Besides our significant increase in the number of contracted seats, this percent has also increased with lower origination volume or decreased with higher origination volume.

In the fourth quarter, we booked a total of 9,800 seats then all seats breakdown as follows; new seats totaled about 6,500, conversions and add-ons about 1,700 and upgrades about 1,600. Active SaaS Encompass users increased by 2,500 in the fourth quarter.

In the fourth quarter, although we saw an increase in SaaS Encompass users, we saw a decline in active Encompass users overall. As anticipated, the number of active users on our self hosted platform decreased and the pace of SaaS user implementations slowed as lenders focused on preparing for the new QM and ATR regulations which became effective in early January.

In addition, we continue to on board a greater number of larger clients which require longer implementation cycles. As 2014 began in the shock of new regulation settles in, we have seen already an uptick in overall active users in January.

Revenue per active Encompass user decreased 21% year-over-year to $327 and revenue per active SaaS Encompass user also decreased over Q4 of last year to $292 due to a decrease in the number of closed loans per active SaaS user as well as lower network transactions due to reduced overall loan volumes.

Contracted revenue per user increased over the same period. It’s important to note that these metrics can also fluctuate quarter-to-quarter based on how many new users we add and the revenue mix for the period. On-demand revenue, which includes the SaaS and success based pricing version of Encompass as well as our document preparation, compliance, and product and pricing services, and transaction revenues from the Ellie Mae network increased to $27 million from $26.6 million in the fourth quarter of 2012.

On-premise revenue, which primarily includes legacy license software products and maintenance fees was $3.3 million for the fourth quarter, down from $3.4 million in the prior year period, as we continued to move DataTrac and Encompass self hosted users to our SaaS platform.

Cost of revenues for the fourth quarter was 27% of revenue or $8.2 million compared to 22% of revenue or $6.5 million in the prior-year period; this increase was due primarily to staff added an implementation, professional services and customer support including the associated stock-based compensation expenses as well as depreciation related to our data center investments and third-party royalties to support these increased revenues. This resulted in gross margin for the quarter of 73% compared to 78% in the fourth quarter of last year.

Sales and marketing expenses for Q4 of 2013 totaled 20% of revenue or $6.1 million compared to 18% of revenue or $5.3 million in the prior year period. The dollar increase was due to an increase in salaries, benefits and stock-based compensation related to the increase in staff for strategic account sales, client services and marketing plus the Encompass experience users summit we held in October. We expect sales and marketing to remain in the 15% to 20% of revenue range as we move forward.

R&D expenses for the fourth quarter were 20% of revenue, or $6 million compared to 16% of revenue or $4.9 million in the prior year period. This dollar increase was due to the addition of new development in quality assurance staff and an increase in stock-based compensation over the prior year’s quarter. R&D is also expected to remain in the 15% to 20% range for the near future.

General and administrative expenses for the fourth quarter were 26% of revenues or $7.7 million compared to 25% of revenue or $7.4 million in the prior year period; this increase was primarily due to an increase in stock-based compensation expense and use of consultants and temporary contractors for technology infrastructure, ERP implementation, and compliance projects. We expect G&A as a percentage of revenues will be reduced as we gain additional scale.

Overall, in the fourth quarter, our higher operating expense levels were due to the cost of our October Encompass experience user summit, aggressive hiring to increase our sales, development, implementation, and customer support teams, significant investments in our data centers and the related stock-based compensation expense.

Income from operations for the fourth quarter was $2.3 million or 8% of revenue compared to income from operations of $5.8 million or 19% of revenue for the prior year period due to the headcount investments as I mentioned.

Net income for the fourth quarter of 2013 was $1.6 million or $0.06 per diluted share, compared to net income of $4 million or $0.14 per diluted share in the fourth quarter of 2012.

This year, our effective tax rate was 35% compared to 8% for 2012 and going forward, we expect our GAAP tax rate to be approximately 40%. On a non-GAAP basis, adjusted net income for the fourth quarter of 2013 was $5.3 million or $0.18 per diluted share compared to adjusted net income of $7.6 million or $0.27 per diluted share in the fourth quarter of 2012. Adjusted EBITDA for the fourth quarter were $7.3 million compared to adjusted EBITDA of $10.3 million for the fourth quarter of 2012.

As of December 30, 2013, we had cash and investments totaling $136.1 million, an increase of $9.3 million from the third quarter. We generated $32 million in cash for the full year of 2013. Fourth quarter diluted shares outstanding were $28.9 million compared to $27.9 million in the fourth quarter of 2012.

Capital expenditures for the fourth quarter were $1.1 million or 4% of revenues. These expenditures were comprised of capitalized project cost for new products and ERP implementation in addition to data center expansion. For the full year, our total CapEx spend was $6.2 million compared to $8.1 million in the prior year.

For 2014, our operating plans include a range of $9 million to $10 million in capital expenditures, approximately one third of this total will be capitalized R&D project cost and the remainder will include investments in data center infrastructure storage and data security primarily.

At Sig mentioned, our goal is to invest across the business to extend our leadership position and drive growth. Given the strong demand environment for our solutions, we will continue to invest at a healthy rate in 2014, particularly in the areas of engineering and development.

Before we get to guidance I would like to note that we will provide a new set of metrics in 2014 to include the most meaningful data points on evaluating our progress. These new metrics should also provide greater visibility and to help fluctuations in the origination market affect our financial performance.

So for 2014, we plan to provide the following metrics; total active Encompass users, total active SaaS users, total contracted SaaS seats, total SaaS revenues, total revenue per active Encompass user, total contracted revenues and total on-demand revenue versus on-premise revenue. We will post a supplemental datasheet on our website to provide some history for these new metrics as well.

Now turning to the guidance for 2014; our 2014 annual guidance takes into consideration industry forecast for mortgage origination volumes in 2014. Three national organizations published monthly updates of their annual and quarterly forecasts, a composite forecast that Fannie Mae, Freddie Mac, and the Mortgage Bankers Association for 2014 mortgage origination volume is currently $1.26 trillion, which represents 31% decline in mortgage volumes from 2013.

The current composite quarterly forecast for 2014 origination volume is as follows; Q1, $295 billion, Q2, $362 billion, Q3, $330 billion and Q4, $273 billion. Against this backdrop, for the first quarter of 2014, our revenue is expected to be the range of $30.5 million to $31.5 million.

Net income is expected to be breakeven to $500,000 or $0.00 to $0.02 per diluted share. Adjusted net income is expected to be in the range of $3.8 million to $4.5 million or $0.13 to $0.15 per diluted share and adjusted EBITDA is expected to be in the range of $5.1 million to $6 million.

For the full fiscal year 2014, revenue is expected to be in the range of $150 million to $153.5 million. Net income is expected to be in the range of $11.8 million to $12.5 million or $0.40 to $0.42 per diluted share. Adjusted net income is expected to be in the range of $31.9 million to $33.2 million or $1.08 to $1.11 per diluted share. And finally, adjusted EBITDA is expected to be in the range of $45.8 million to $47.5 million or 31% of revenues.

Before we turn to your questions, I would like to mention that we will be presenting at the JMP Technology Conference in San Francisco in March and the 26th Annual Roth Conference in Laguna Niguel also in March. A forthcoming press release will be issued with additional details on these events.

And now we’d like to open the lines for questions, operator.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question is from the line of Brian Schwartz with Oppenheimer. Please go ahead.

Koji P. Ikeda – Oppenheimer & Co., Inc.

Good afternoon guys this is Koji Ikeda for Brian Schwartz. Thank you for taking my questions.

Sig Anderman

Hi Koji.

Koji P. Ikeda – Oppenheimer & Co., Inc.

I was wondering if you could talk a little bit about how the overall customer feedback has been towards moving towards more of their transaction type Ellie Mae platform, I believe they’re currently using around half of what’s available and I was kind of wondering where you see the adoption curve as with your current base and are you expecting that adoption at a more linear rate or something more dynamic?

Jonathan H. Corr

Koji, this is Jonathan. Yes you are correct in that, on average out of the dozen plus settlement services were transaction types that are available across the network, on average folks are around six, that’s an overall average. We have customers that do all of those transactions type. We have continued to see that move and grow at a pretty steady pace from four in 2011 when we initially went public to five in 2012 to on average six in 2013 and we expect to continue to see that grow at the pace that we’ve been seeing.

Again, each of the categories of services follow different technology adoption curves if you will, because they are different types of services that are unique, but what we’re seeing and I think we have shared this in the past is that many of the services that are nearly starting to ramp-up on their adoption curves compared to some that have already been fully adopted are higher value transactions for us, where we have seen full adoption of things like credit or flood and we received about $1 a transaction across the network categories like appraisal, title, [indiscernible] and other services in which we receive significantly more on the average of 10 are really moving up their adoption curves.

So, hopefully that gives you some insight to our expectations, but again our strategy has and will continue to be automating everything that’s unavailable and driving all of the service business been ordered electronically that’s what we do with our teams and our sales people and our account managers in terms of helping our customers get there and we continue to see that progress and we continue to expect to see a continued amount of healthy cliff.

Koji P. Ikeda – Oppenheimer & Co., Inc.

Great, thanks. And just a quick question on MortgageCEO acquisition, I apologize if I missed it from the prepared remarks, but did you give a number of how much revenue you’re expecting from it for this year?

Jonathan H. Corr

We actually did not. It’s very minimal revenue impact from the actual acquisition itself. We started selling it in the beginning of the year and we expect to see a real traction as we go through the year, but we expect it to be a modest amount of revenue contribution in 2014.

Koji P. Ikeda – Oppenheimer & Co., Inc.

Great guys. Thanks for that.

Operator

Thank you. And our next question is from the line of Brad Sills with Maxim Group. Please go ahead.

Brad H. Sills – Maxim Group LLC

Hey, guys. Thanks for taking my question. A question on the new bookings number, very good number there on 9,800. Jonathan, could you comment a little bit about where you are in productivity on some of the new hires you’ve had? Obviously, you are getting some results so far, but where you are kind of in that cycle with some of the new hires from last year?

Jonathan H. Corr

Great question. I think we continue to see great performance from that team. As stated by Sig, we really increase that team and as you have seen over the last five quarters, we have delivered over 9,000 seats a quarter, 9,800 in the most recent quarter.

We are very happy with the performance of most of our current executives, just as anything else, you kind of evaluate new folks, some that are not hitting the line, you end up upgrading and that’s a continuous process. I think as Sig mentioned, we will be continuing to expand and invest in the sales and marketing side as we have seen just an opportunity to continue to put that pedal to the metal and gain more share from our competition. So, we are very happy, but we are continuing to push for more.

Brad H. Sills – Maxim Group LLC

Great, thanks Jonathan. And then, very good numbers again on the active SaaS users this quarter. The total active obviously declined a little bit and it looks like that came through in the other on-demand revenue category. Can you comment a little bit about kind of where you are you think in some of the fallouts from just the refi declines in volumes, did you see that kind of that revenue base stabilizing in Q1 or Q2 or where you think you are in that cycle? Thank you.

Jonathan H. Corr

Sure Brad. You can see in the numbers that we have mentioned, we did see some modest drop in some of our self-hosted active users in Q4 that we expect it was definite hike to some of the reduction in refinance, but we saw a continued uplift in the active users. We actually expect that to continue and to further accelerate. As we said in Q4, I think we saw again some of our large implementations are taking a bit longer and so although we have the bookings and we are actually receiving revenue for the contracted fees at a base level, we have not seen all those guys go into active usage.

We also saw I think a little bit of in Q4, people preparing for the new regulation, Qualified Mortgage and ATR and so again, active users did not increase as much as it has in previous quarters, although it did increase. That being said, now the regulation is actually has been in effect for a number of weeks now.

We are already seeing an uptick in January in terms of all active users and we expect just continue to see the growth on the SaaS side, some level of movement or reduction on the license side as we move folks, but still a very robust picture, really a very excited about 2014.

Brad H. Sills – Maxim Group LLC

That’s great to hear. Thanks Jonathan.

Operator

Thank you. And our next question is from the line of Raimo Lenschow with Barclays. Please go ahead.

Chris Hogan – Barclays Capital, Inc.

Hi guys, this is actually Chris Hogan on for Raimo.

Sig Anderman

Hey Chris.

Chris Hogan – Barclays Capital, Inc.

Hey. So I just wanted to stay on the kind of implementation side. Obviously the bookings continued to be really strong. Is it really just the nature of the customer, some of the bigger customers that are coming on, is there something on your side that you guys can do to really start getting those bookings to flow in a little bit faster or is it really just the nature of the customer base and how that’s changing over time or is there more investment that you guys can make the kind of speed up the implementation process?

Jonathan H. Corr

So that's a great question and I think the answer is yes on both avenues. One is, we absolutely are investing in more services and capabilities there, the larger customers have greater and more complex needs, and we are selling more customers. So we are investing in adding them and that's part of what we did in Q4 and we’ll see continued investment across the Board but that's a category of investment. But at the same time, as we are selling a greater share of our customers in the larger segment they take longer to implement, because their bigger organizations be more complex, there is more going on in terms of laying down their workflows working through them, we are training in change management.

Now it’s all relative, I mean these implementations are still implementations that take under 12 months. But these are the implementations in some cases that take three months. So, we are seeing that move upwards. So, we are going to continue to see that probably extend but at the same time we are working to limit that expansion as we add more resources in talent, but ultimately it’s going to be a bit of a longer cycle than we’ve seen historically.

Chris Hogan – Barclays Capital, Inc.

Got you, that's helpful and then just a quick one on ATR and QM I mean at the User Conference in October as obviously I mean pretty clearly a number one issue for everybody at the conference. I mean, is it something that you guys are I guess one, is it something that you are leading with in the SaaS cycle when you are talking to a new customer, your ability to address it and then two, I’m kind of coming back, on the financial is it dealing with those rules, is it incremental dollar value to the subscription or is it just kind of core functionality that’s built into Encompass dealing with those growth?

Sig Anderman

Great questions, Chris. So, we lead with and have led with and will continue to lead with one of our biggest differentiators in this marketplace which is our compliance capabilities. ATR and QM fall into that and so that there is very much a part of the message that's out there because that is what these lenders are very concerned about and obviously we got the QM and ATR that came out but there is additional regulation that will come out later this year and then even more robust and demanding language around integrated disclosures that will come out in 2015. So that's a key piece for us, a key lead for us and the market sees us as the market leader there.

And so the idea that if becomes is very much as virtuous cycle as a lot of the business that we pick up or we will continue to pick up and we are continuing to see more and more activity is around our compliance leadership, which is obviously a unique differentiator.

In addition, as you said it’s not that we are actually getting incrementally more revenue from customers there but their clause are going up with compliance. And so, if it comes that much more of an attractive reason for them to stay with Ellie Mae because we can – we’re are in a very unique position to address their needs and their challenges but also the attraction for prospects in new customers as they look at the situation, the cost of doing what they continue to do without embracing Encompass and its compliance capabilities, push the matter of competitive disadvantage to other lenders in the marketplace. And so again it becomes a virtual cycle for us, it’s just – it’s a wonderful place to be right now.

Chris Hogan – Barclays Capital, Inc.

Great, thanks a lot guys.

Operator

Thank you. And our next question is from the line of Michael Huang with Needham & Company. Please go ahead.

Michael Huang – Needham & Company

Hey guys. How are you guys doing?

Sig Anderman

Hi, Mike. Good.

Michael Huang – Needham & Company

Just a couple of questions for you guys. So in terms of the strength of new customer bookings in the quarter, wanted to understand whether or not these regulatory changes that I just wanted to affect in January. How much of that represented a catalyst for some decision making and kind of the bookings in the quarter and if so I mean how should we think about how new customer booking should trend as were in Q1 and through the year?

Jonathan H. Corr

So, it’s a good question Mike. So Q4 – I mean guys that were obviously embracing or buying into our solution, these guys are going to be implemented in the first quarter of the year. So they’re buying for the fundamental overall compliance need that they see not necessarily for QM and ATR because QM and ATR are already in place. We expect to see continued pace of sales. As additional customers see that they’re challenged by what’s going on with QM/ATR.

And as we enter the middle of the year people will start thinking about the other regulation that I mentioned that’s going to go in effect next year which is called the integrated mortgage disclosure. We are basically two major regulations RESPA, Real Estate Settlement Procedures Act and Truth-In-Lending two are going to be merged into one set of disclosures, which is a major change from something in the way it’s been operating for the last 30 plus years. So I expect that we’ll continue to see this level of activity, and Q4 is just an example of what the momentum will be probably for 2014 and into 2015.

Michael Huang – Needham & Company

Gotcha, and in terms of all the new seats that you had in Q4, I wonder if you could provide a little more color around kind of what the mix was, I mean how many of these were from the kind of the larger lenders that you historically might not have served as much off and then maybe in terms of, from a competitive stand point who will you replace most often?

Jonathan H. Corr

So, in terms of the 9,800 as Ed and Sig mentioned is that 6,500 and which were new seats at new customers, a portion of that was Ditech, couple of 1000 plus but others were a mix of mid to larger customers and still reflected that by far the best quarter we’ve seen in terms of new users. [indiscernible] …

Michael Huang – Needham & Company

From a competitive stand point…

Jonathan H. Corr

From a competitive stand point, it kind of cuts across the boards. We said we’ve continued to see a lot of the smaller private companies as well as some of the public companies. We are pulling customers from Davis + Henderson mortgage block, Avista, like Avista. We are pulling customers from Mortgage Cadence/Accenture, we are pulling customers from Calyx, we are pulling customers from LPS, PCLender. It really cuts across the board. When I look at the analysis of what's out there, it’s a broad array because again our solution just is perceived as better from an overall solution standpoint, cost of ownership, completeness and again number one compliance capabilities.

Michael Huang – Needham & Company

Got you. And my last question for your, again I apologize, if I missed this one. So you in terms of some of how you are expanding in the TQL program to your lender clients by bundling some of these services. I was wondering if you’ll provide some color around how we should be thinking about how that increases loan pricing. So maybe from a dollar part of the loan standpoint on top of except this pricing? Thanks so much.

Jonathan H. Corr

Ed, you want to cover that one in terms of how that looks?

Edgar A. Luce

Yes, the color I think it was Chris a moment ago, you talked about the core functionality I think is very appropriate. Those services are becoming and we intend to them become more and more embedded in the way that our clients are originating these loans. Most of the revenues from those services are in what we’ve been referring to as standalone or subscription services. Some of those costs are network fees, some of the investor fees, for example, our network revenues. So it’s very difficult and it’s going to get even more difficult to actually break all of those out and roll them together and say here are the TQL revenues going forward. It’s getting to be a very much a bit of a blend Mike. Is that what you are looking at?

Michael Huang – Needham & Company

Yes, I was just wondering, in general if we are thinking about, $100 per loan of Success-Based pricing, as you are successful in rolling kind of TQL and getting your clients to embrace that on the lender side, does that take the $100 to $115 or $120 on top of kind of what the mega lenders paying it for TQL and I actually there is a way to think about that?

Edgar A. Luce

We have two comments for you. Of the costs, that should have more than what you are talking about $15, we should be in the potential of $75 or more with TQL costs rolled up per loan.

Edgar A. Luce

Yes. Jonathan you want to …

Jonathan H. Corr

Yes. I think I means it’s renewed here, so if you just have to break it out pass it for a little bit, we still see or obviously investor fees that come in the case when it actually is delivered to investor, but for every TQL loan the lender is doing, we are in that scenario we are picking up income verification, we are picking up fraud detection. We’ll be picking up services like flood and other verification services and each one of those, brings anywhere on a gross level basis from $10 to $15. So $75 is a good way to think about it as we drive towards adoption of some of those services.

Michael Huang – Needham & Company

Great, thanks so much guys.

Operator

Thank you. And our next question is from the line of Patrick Walravens with JMP Securities. Please go ahead.

Unidentified Analyst

Hi it’s Peter Martin [ph] in for Pat. I guess the follow-up that last line of questioning I think you saw two new TQL participants. I mean I’m curious, are the used cases for your TQL participants different than the ones where the few large ones we have now or are they the same?

Jonathan H. Corr

Class, when you say a used case Pete what do you mean?

Unidentified Analyst

Basically what they are using it for, are they using it for the thing that your current large TQL participants you’re using for or anything different?

Jonathan H. Corr

Yes, as we are adding more capability in terms what we can deliver to these investors as part of the value proposition. They are absorbing more of that capability. So, not only are they picking up as part of what we are doing in some of that, we are untampered with services that are part of TQL, but also delivery of data and images are part of the value proposition. So, again we mentioned both PHH which – which is top 10, top 5 at this point now it’s just looking at the purchase mortgage producers they were at number four in latest quarter and Stonegate which is a newly public company that has been skyrocketing out the ranking says as they acquire new companies both of those guys are looking and embracing all the stuff that was being embraced by Wells and Citi and Homeward and as well some of the incremental thing that we’re adding to the puzzle.

Unidentified Analyst

Okay, great. And I think you said to 6 in the top 25 mortgage originators or customers, can you talk just a little bit about the how do you see the current opportunity at mega banks?

Jonathan H. Corr

Yes and when we started off back to take a company public in April of 2011. We – we were considered that the large mega banks or the large groups to be basically the top 25 or 30. And as we didn’t think that market was ready for in SaaS, total cost of ownership type of solution. During that time we’ve continued to get pulled and really resonate in that segment. And so six of the top 25, two of the top 10 now and as Sig mentioned earlier, we are seeing that almost every retail channel of the lenders out there including the megas could really benefit from our Encompass offering.

So, it may not picking up all the top guys right away or Wells, the Chase or Citi in terms of Encompass and all other channels. But given the fact that we started the getting into some of these very, very large institutions in terms of Ditech and others we believe that breaking into the retail channel in these mega lenders and I said mega is really at that top of 5 or 6 is just a matter of time.

Unidentified Analyst

Great, thanks.

Operator

Thank you. And our next question is from the line of Samad Samana with FBR Capital Markets. Please go ahead.

Samad Samana – FBR Capital Markets & Co

Hi, good evening. So, I wanted to go back to TQL you mentioned that two new partners were signed up Stonegate and PHH I was wondering if you can give us an update on where Citi and Ocwen [ph] are in the process of going live and then PHH actually you’ve mentioned that they’re going to go through, explore strategic alternatives, I was wondering if that’s going to impact from potential sale would impact them participating TQL? And then I have a follow-up.

Jonathan H. Corr

It’s tough to comment on their hosting around the sales side, I don’t know what they’re going to do there. From our perspective, what we’ve heard from them is, they’re full speed ahead on what we’re doing together around TQL. You asked about Wells and Citi continues to progress, Homeward has been rolling out or will be rolling out as we start the year off and then PHH and Stonegate will take a little longer just because it takes time to implement these guys.

Again a thing to remember even with the value proposition here is that the investor value proposition is one aspect of it and as Sig mentioned, here we’re really seeing the value proposition, look like it’s resonating even louder and where we think traction will be even quicker is the general value proposition of TQL to our lenders and even its relevancy around some of the additional things that we’re going to do for customers around the regulations like Qualified Mortgage and ATR.

So, we’re actually very, very, very excited about what we think we’re going to see in terms of traction in 2014, because as we played out and twit the value proposition in Q4, we really saw some nice traction with some customers. We have kind of twit further our value proposition and we are actually aggressively rolling out right now TQL to a much broader set of lenders not being restricted by the specific investors that they do business with. Actually even as recently as yesterday, we had a webinar with hundreds of our customers on the webinar anxious to learn more about how they can leverage TQL.

Samad Samana – FBR Capital Markets & Co

What percentage of the company’s volume at this point touches TQL related products? And how is that changed over the last 18 months?

Jonathan H. Corr

I’m not sure I followed the questions Samad.

Samad Samana – FBR Capital Markets & Co

So of the ones that you are customers are originating using Ellie Mae, how many of those are, what percentage of that is going through or using TQL related services?

Jonathan H. Corr

A fairly, fairly modest amount. I think that we had said last year that we expected about $5 million in revenue in 2013, attributable to TQL and I would say that’s about where we were in 2013. So it’s been a very modest amount relative to the opportunity, but we’re really beginning to see good traction there.

Samad Samana – FBR Capital Markets & Co

Okay and Ed I had a question for you. The new metric for contracted SaaS users that you’re going to provide, does that include both success based pricing and non success-based pricing users or how does that metric roll up?

Edgar A. Luce

Yes, that will be all of our SaaS contract seats and so that includes the traditional SaaS guys that we have who are paying a base fee per month per seat regardless of activity and it includes the success-based pricing.

Jonathan H. Corr

And one of the things just to remind you Samad, that the recent thing stop breaking it out, because the percentage of folks that are on just the straight SaaS model versus success based pricing is a very small fraction of the users.

Samad Samana – FBR Capital Markets & Co

Okay. And then one last question and I will jump out; so looking at 1Q guidance and full year guidance, it implies a pretty dramatic ramp over the three quarters; 2Q, 3Q, and 4Q what gives you confidence in the ramp that it won’t get sequential increases, it will be some of the biggest increases that company have seen on a sequential basis, is that users coming on, is that volumes improving. How should we think about that as remodeling going forward?

Sig Anderman

Yes, I think it’s users that we’ve sold very well obviously in 2013 especially the last two quarters, we’ve got these contracted seats that it’s going to be rolling out as we go into 2014, also by improving the volume. I think the answer is, we saw dramatic drops in volume in the second half of 2013, both in terms of Q3 and then Q4.

As we are coming into 2014, although volume overall is going to be down, the volume reductions quarter-over-quarter are actually not merely reducing much anymore, they are pretty I would say relatively flat as we go from Q1 through the rest of the year and so that's really what happened, its been the pressure of big volumes drops comes out of the mix, all of the growth of the new users, I mean the new seats and their uptick in terms of service usage, shines through one of the things that I think folks have asked in the past in terms of revenue per user and that was it kind of coming down over the last number of quarters and I have said in the past I think and has started with that.

We expect to see that starts to rise again as we go into Q1, Q2 and the rest of the year as that volume pressure comes off and I think that's again another aspect of it.

Samad Samana – FBR Capital Markets & Co

Okay, great, thanks for answering my questions.

Sig Anderman

Thanks Samad.

Operator

Thank you. And our final question is from the line of Pat Walravens with JMP. Please go ahead.

Unidentified Analyst

Great, thank you. It’s [Indiscernible]. I know, I know, I’m sorry. So first of all congratulations on executing in Q4 again, what’s been challenging mortgage origination backdrop. And then secondly, and I think I know the answer, I just want to ask, in Q4 when we asked you guys were still sort of targeting a 25% growth rate in 2014, but this guidance by my math is more like 17% to 19%. How did you think about when you gave the guidance?

Edgar A. Luce

Well there is a couple of things there Pat, this is Ed. One, overall we still expect over the long-term to be 25% growth that's always our target, not necessarily our expectations around this year, but that's our target. For this year what we’ve done is on top of our modeling and our seat acquisition and seats implementation, we have to take into account the worst mortgage volumes than what we were saying earlier at least the forecasted mortgage volumes for the year. So that's what we built into this plan.

Jonathan H. Corr

Yes, and again I think we built in a conservative view on potential attrition with customers, et cetera and reflective of market expectations that’s all I would say. Again one of things that you mentioned was Q4 we did come through, we did execute and keep in mind that was a 47% drop Q4 over Q4. So we’re taking a conservative stand even though our long-term target is for 25%.

Unidentified Analyst

Okay thanks. Thank you.

Jonathan H. Corr

Sure.

Operator

Thank you. And this time I will turn the call back over to management for any closing remarks.

Sig Anderman

Well, thank you all for joining us today and we look forward to talking to you next quarter and hopefully meeting some of you between now and then.

Operator

Thank you. Ladies and gentlemen, this concludes our conference call for today. If you would like to listen to a replay of today’s conference, please dial 303-590-3030 or 1-800-406-7325 and enter access code, 4663759. We’d like to thank you for your participation and you may now disconnect.

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