Ellie Mae (ELLI) CEO Sig Anderman on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Ellie Mae, (ELLI)

Ellie Mae, Inc. (NYSE:ELLI)

Q2 2014 Earnings Conference Call

July 31, 2014 04:30 PM ET

Executives

Lisa Laukkanen - Managing Director, The Blueshirt Group LLC

Sig Anderman - Chairman and CEO

Ed Luce - CFO and EVP

Jonathan Corr - President and COO

Analysts

Raimo Lenschow – Barclays

Michael Hong - Needham & Company

Brian Schwartz - Oppenheimer

John Campbell - Stephens Investments Inc.

Brad Sills - Maxim Group

Brandon Dobell - William Blair

Operator

Good day and welcome to the Ellie Mae, Inc. Second Quarter 2014 Earnings Call. Today’s conference is being recorded.

At this time I would like to turn the conference over to Lisa Laukkanen with The Blueshirt Group. Please go ahead ma’am.

Lisa Laukkanen

Good afternoon and thank you for joining us on today’s conference call to discuss Ellie Mae’s second quarter 2014 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 Web site 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 and 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 Anderman

Thank you, Lisa, and good afternoon and thanks to all of you for joining us. This afternoon I will talk about the business highlights for the second quarter and then Ed will review the details of our financial results. And after that, we’ll answer any questions you may have.

Our second quarter results were just terrific across the Board. Revenues were a record $40 million, adjusted EBITDA was $13.2 million and we booked forward 10,400 seats; the second best quarter we have ever had. And we did this all in the face of a 50% decline in mortgage volume in the first half compared to last year and an approximately 40% decline year-over-year for the second quarter alone. Our business momentum continues to be driven by adding more users to our Encompass software as a service platform and ramping usage of the Ellie Mae network and our own proprietary services.

Lenders are embracing our comprehensive solution to meet the ever-increasing regulatory demands and investor requirements and at the same time improve operational efficiency. We believe our strong sales results are a confirmation that we have a very-very effective lender solution. And we believe the demand for our comprehensive all-in-one solution will continue well into the future as lenders are already beginning to focus on next year’s RESPA-TILA integrated mortgage disclosures and accompanying rules which some believe will be the most challenging set of regulations ever.

Our pipeline of sales opportunities remains strong and we have a healthy backlog of customers and implementations. Many of our new customers are among the top hundred lenders in the country, as they too see the advantages of a hosted comprehensive solution built and maintained by Ellie Mae. Of course these larger lenders make up more and more of our prospects into users, it will be more of a variance in quarterly seat bookings and implementations as the shift of one or two large deals during the quarter can have an impact. However, we remain confident in the overall sales prospects for the entire year.

So we expect new seat bookings to remain solid, slightly higher than Q1, 2014 levels, although likely lower than quarterly bookings in 2013. At the end of Q2 we had about 99,000 active Encompass users, up 12% from the second quarter of last year. The reception from our lender customers and our total quality loan program also continues to be positive. TQL delivers what we believe to be the best practices workflow to promote a high level of compliance, loan quality and efficiency and it enables lenders to demonstrate to regulators the controls they have in place to track quality and the steps that they have taken to promote compliance, particularly in an environment of increasing cost to originate loans, the standardized streamlined regimen of TQL is an attractive value proposition for lenders. And at the same time investors like it because the loans purchased from lenders adhering to the TQL format are of higher quality and ultimately all these activities increased both transaction and service usage on the Ellie Mae network and therefore our revenues. We expanded our product offering with a launch this month of our new customer, consumer direct solution. Encompass Consumer Direct is a new self-service and lead generation solution for lenders looking to enhance service and efficiency with tech-savvy borrowers. Borrowers can access the web based solutions 24-7 to research loan products and rates, apply for a loan and upload and electronically sign documents. Lenders can easily configure Encompass Consumer Direct to fit their own business models and identity. We believe this will help lenders expand their channel offerings, generate leads and close more loans.

Current industry forecast call for a further decline in mortgage volume in the second half, not a significant decline but a decline. Given our momentum and first half results we are still maintaining our revenue guidance for the full year.

Our first half results even in the face of massive industry volume headwinds once again confirm that we are not a mortgage company. We are a SaaS technology company with ever increasing recurring revenues, serving a very needy mortgage industry and our first half results confirm once again that lenders need great technology to deal with this challenging regulatory environment with growing investor demands for quality and at the same time improve efficiency and lower overall production costs and they need it whether or not the market is up or down.

And interestingly enough need it not any less when mortgage volumes are down. It goes without saying that I am very pleased with our second quarter results and I’m very optimistic about our business going forward as the forecast by Fannie Mae, Freddie Mac and the Mortgage Bankers Association anticipate an end to the very significant sequential declines in mortgage volumes we have seen for the past few years. It will be very nice to get out of the headwinds we have been facing and start sailing with our sails full and the wind behind us.

With that I’ll turn the call over to Ed Luce, our CFO to discuss our results in more detail. Ed?

Ed Luce

Thank you, Sig. Good afternoon and thanks again to everyone joining us today. So turning to our results for the second quarter of 2014, total revenue for the second quarter as Sig indicated was $40 million compared to $34.3 million for the second quarter 2013. Contracted revenue increased to 61% of revenue or 24.3 million for the quarter compared to 50% and 17.3 million from a year ago period. This percentage increased as a result of the continued addition of new seats on our hosted platform and as lower origination volumes impacted the variable revenue portion.

The total number of active Encompass users increased 12% year over year to about 99,000. As Sig mentioned we also booked 10,400 seats in the second quarter, those seats break down as follows in round numbers, new seats totalled 5,300, conversions and add-ons were 2,800 and upgrades were 2,300.

Active SaaS Encompass users increased 29% year over year to over 72,000. These users also increased sequentially by approximately 4,700 in the second quarter and contracted SaaS users, the total number of SaaS seats under contract increased 39% year over year to about 110,000. Revenue for active Encompass user increased 3% year over year to $410 for the quarter and 20% sequentially. This metric does fluctuate quarter to quarter based on how many new users we add and the revenue mix for the period as well as the volume of loans processed by our Encompass users.

Implementation and professional services revenue increased significantly year over year as this new segment of our business gains traction in the marketplace. Sequential growth for professional services was also strong over the prior quarter.

In addition to the new seats and service revenues, network transaction revenue also drove the growth over the prior quarter with stronger transaction volumes in the second quarter and we continue to see growth in more transactions per loan avocation.

On demand revenue which includes the SaaS and success-based pricing version of Encompass as well as our document preparation, compliance, product and pricing services, transaction revenues from the Ellie Mae network and training and professional services all increased 21% to 38.1 million in the quarter from $31.4 million in the second quarter last year.

On-premise revenue, which primarily includes legacy license software products and maintenance fees, was $1.9 million for the second quarter, down from $2.9 million in the prior year period, and down 100,000 from the first quarter 2014, as we continue to convert DataTrac users and upgrade Encompass self-hosted users to our SaaS platform.

The cost of revenue for the second quarter was 26% of revenue or $10.6 million compared to 25% of revenue and $8.6 million in the prior-year period. This increase was due primarily to staff added in implementation, professional services and customer support. This resulted in gross margin for the quarter of 74% compared to 75% in the second quarter of last year and 71% in the first quarter of 2014. We expect this gross margin to remain in the 71% to 74% range while we continue our accelerated investment programs in virtually all areas of our operation.

Sales and marketing expenses for the second quarter of 2014 totaled 16% of revenue or $6.5 million compared to 15% of revenue and $5.2 million in the prior year period. The dollar increase was due to an increase in staff for client services and business development primarily. We expect sales and marketing to remain in the 15% to 20% of revenue range for the second half.

R&D expenses for the quarter were 15% of revenue, or $6.1 million compared to 19% of revenue and $6.5 million in the prior year period. This dollar decrease was due to a higher level of R&D capitalized in the current quarter as we continue developing the next generation Encompass platform mobile applications in our consumer direct solution.

General and administrative expenses for the second quarter were 24% of revenue or $9.6 million compared to 23% of revenue and $8 million in the prior year period. This increase was primarily due to an increase in staff, and activities associated with our continued growth including the expansion of our corporate strategy and business development functions, our M&A activity and the use of consultants and temporary contractors.

Overall, as we indicated in our last earnings call we continue to invest in our future growth during the second quarter resulting in higher operating expense levels. We increased our staff by 33 people in the quarter, mainly in research and development and we accelerated investments in our SaaS operations and infrastructure. Our total headcount at June 30, this year was 499, an increase of 141 people or nearly 40% from a year-ago.

As Sig noted in his comments we do believe it’s a prudent strategy to take the opportunity to accommodate growth and further distance ourselves from our competitors. Even with these investments, income from operations for the second quarter was $7.3 million, 18% of revenue compared to income from operations of $6 million, or 17% of revenue in the second quarter last year. Net income for the second quarter was $4.4 million or $0.15 per diluted share, compared to net income of $3.7 million or $0.13 per diluted share in the second quarter last year.

This quarter our effective tax rate was 41%. For the remainder of the year we expect our GAAP rate to be approximately 40%. On a non-GAAP basis adjusted net income for the second quarter was $9.1 million or $0.31 per diluted share compared to adjusted net income of $8.2 million, or $0.29 per diluted share in the second quarter 2013. Adjusted EBITDA for the second quarter was $13.2 million compared to adjusted EBITDA of $11.7 million for the second quarter last year.

Now shifting to the balance sheet. At June 30 we had cash and investments totaling over 142 million, an increase of 9 million from the prior quarter. We also announced our 75 million three-year stock buyback program during the quarter. To-date we have not made any share repurchases under this program. And in the third quarter we will be making our final installment payment for the Del Mar Datatrac acquisition of approximately $2 million. Our receivables balance of 16.8 million at June 30 remain healthy as our DSOs continue to run in a range of 34 to 36 days.

Second quarter diluted shares outstanding were $29.3 million compared to $28.3 million in the second quarter of 2013. And CapEx spend for the second quarter was $4.9 million, so, $7.4 million for the first half of this year. These expenditures included capitalized project cost for new products, next-generation Encompass, in addition to SaaS operations expansion. We will continue to invest at a healthy rate in the second half of the year in several additional CapEx initiatives particularly in the areas of engineering, development and SaaS and network operations.

For the year our operating plans include a range of 14 million to 16 million in CapEx. Direct capital investments include funds for storage capacity upgrades in our Santa Clara, Chicago and Sacramental Datacenters, expansion of our Omaha Technology Center, additional software licenses plus further expansion of our development in QA labs.

Now turning to the guidance for the second half of 2014. As we noted previously our 2014 annual guidance takes into consideration industry forecast for mortgage origination volume. Three national organizations published monthly updates of their annual and quarterly forecast, a composite forecast of Fannie Mae Freddie Mac and Mortgage Bankers Association for 2014 mortgage origination volume is currently at 1.1 trillion which represents a 41% decline in mortgage volumes from 2013 and a 5% reduction from the 2014 forecast we referenced in our last earnings call.

The current composites quarterly forecast for 2014 origination volume is as follows. Q1 is 238 billion; Q2 is 310 billion, Q3 306 billion, and Q4 251 billion. For the third quarter of 2014, we expect revenue to be in the range of 39.5 million to 41 million. Net income is expected to be in the range of 1.6 million to 2 million or $0.05 to $0.07 per diluted share. Adjusted net income is expected to be in the range of $6.4 million to $7.1 million or $0.21 to $0.23 per diluted share and adjusted EBITDA is expected to be in the range of $9.7 million to $10.8 million for the quarter.

So we posted strong results for the first half of 2014, against a rather dramatic decline in national mortgage volumes. As Sig and I have already noted, the National forecasters are predicting further declines in volumes for the second half and have lowered their forecast by about 5% for the year from their forecast issued last quarter.

Despite the expected decline in volumes in the second half of 2014, with our current business momentum, strong sales pipeline, and healthy implementation backlog we are maintaining our previous guidance for the full-year. So we expect revenue to be in the range of $150 million to $153.5 million for the year. Net income is expected to be in the range of $8.8 million to $9.5 million or $0.30 to $0.32 per diluted share.

Adjusted net income is expected to be in the range of $28.9 million to $30.2 million or $0.98 to a $1 per diluted share. And adjusted EBITDA is expected to be in the range of $40.5 million to $42.2 million for the year.

And finally, before we turn to your questions, I would like to mention that we will be presenting at the Oppenheimer’s 17th Annual Technology Internet and Communications Conference in Boston on August 13 and at the Credit Suisse Small and Mid-cap Conference in New York in September. A forthcoming press release will be issued with additional details on our participation at these events.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We will moves first to Raimo Lenschow with Barclays..

Raimo Lenschow – Barclays

A couple of questions from me. So first can you talk a little bit about the Encompass Direct, what’s the idea and the business model behind that? Maybe you just -- let’s start with that.

Sigmund Anderman

Sure Raimo, Encompass Consumer Direct is really a solution that is an extension of the Encompass platform for our lender customers. So what it allows them to do is to expose a whole array of functionality online to allow a technology savvy borrower to do more of the process themselves all the way from having credit pulled automatically, pricing the loan, to find the most attractive product for them and interacting through the entire process.

We give the flexibility to the lender to determine how much they want the borrower to be able to do. But the real value proposition here is that, one, you’re responding to the needs of customers that are more technology savvy, the millennials et cetera. And by allowing the borrower to do more of the process themselves, they’re actually lowering their cost of acquisition as the borrower is able to do part of the process themselves and therefore lower the amount of time that a loan officer may be working on that loan prior to qualification. So it’s a very attractive model we've had, really good reception even as we announced it, and we’re really excited about the capabilities of the solution. The model for it is a subscription model where they are paying an amount per month on a year or more contract, and then over a certain amount there is an application fee. So it’s a nice recurring model as well.

Raimo Lenschow – Barclays

And who would pay that? The consumer or the…

Sigmund Anderman

The lender will pay for the service.

Raimo Lenschow – Barclays

So basically an extra offering that he can do, like almost up from before he engages with the client, so it's almost like front loading?

Sigmund Anderman

Exactly, that’s exactly what you’re getting. So you’re kind of responding to the needs of the consumer that want to operate his way, and by allowing the consumer to do it this way, the lenders' cost of getting that loan application to a certain point is reduced materially. And so there is real economic benefit.

Raimo Lenschow – Barclays

Okay, perfect. Next question for me is on the total seat booked, sort of 10,400; that was much-much stronger than we had expected. Can you talk a little bit about it, drive us there, or was there anything kind of specific in terms of launch deals or something or like it was a broad-based trend or do we just kind of model it wrongly? Just help us understand that number, because it's very-very strong?

Jonathan Corr

Yes, I think there is of number aspects there. One, obviously we have said in Q1, the people were very focused on ATR and QM. Folks got re-engaged in the decision-making process. So our momentum continued along the lines of what we had been seeing historically even in a down market.

The array of customers was brought, from mid to a larger to enterprise. So it was a healthy mix. As we said we are picking up folks more in the enterprise category, but I would not say there was any one that was enormous. There were a number that were above 400, number that were in that, under that 400 category, and many that were in a couple hundred.

So it was just operating on all cylinders, by the sales force, kind of this virtual -- this, virtuous reinforcement of folks seeing us as the market leader, knowing that they need to continue to prepare themselves for ongoing compliance and regulatory changes, and just a fantastic performance by the sales organization and the folks that support them.

Raimo Lenschow – Barclays

Then last question from me before I pass it back, if I look at the -- so obviously the Q3 guidance has a similar runway to what we saw in the second quarter, but obviously the profitability guidance for Q3 is different, and maybe help us understand where should we put the extra cost there, and what’s going on in terms of investment for Q3?

Sigmund Anderman

The extra cost are really across-the-board but they are primarily in R&D, and that’s all aspects of R&D in the operation, that's engineering, design, products, QA, and if I had to single out one particular aspect of R&D, it’s really the next generation Encompass that we’re working on, putting a lot of resources behind that and accelerating that a bit.

Raimo Lenschow – Barclays

Is that more like one-off spending in Q3 and potentially in Q4, because you want to accelerate it and then once you’re getting the tail end of that, you just kind it’s its last slowing down, or is that kind of an ongoing higher run rate.

Sigmund Anderman

It’s an on-going run rate. The ramp has been accelerated certainly, but most of that work is being done in-house and so those costs will stay in the run rate.

Operator

We will now move to Michael Hong with Needham & Company.

Michael Hong - Needham & Company

Just a follow-up on the Consumer Direct, so I heard you right, I mean it’s a subscription and then is there a success based pricing compounded on top of that; and is that at a lesser amount, then what you would see on a non-Consumer Direct opportunity?

Sigmund Anderman

Let me see if I can understand the question, maybe I'll clarify. So it’s a production model, typically it’s going to be on the order of a couple of thousand dollars a month to even more depending on the size of lender, and they’re going to get a certain amount of applications that are going to be included in that, kind of qualifications as they come into the process. Once they go beyond that, it becomes a piece of mail cost per application. That’s materially less than what you pay for success based pricing in terms of a closed loan. The beauty of this is that we are getting paid on both ends of it. So you kind of think of it as we’re lowering the cost of acquisition for our lender by enabling them to extend out to the consumer. We’re getting paid a subscription fee there, and above a certain volume, getting an application fee, we’re still also getting the fee for Encompass around the success based pricing. So it's an additive benefit that we met.

Michael Hong - Needham & Company

Okay, so just to clarify, so for example, obviously we’re not in the small gap. Like let’s assume that a 100% of all loans kind of went through Consumer Direct as opposed to the traditional [indiscernible] is that -- are you still getting kind of roughly a $100 per loans for the success-based pricing part of it?

Sig Anderman

Yes. And then on top of that we’re going to get amount per application that was qualified even though it may not close but obviously at a lower rate, so it’s a combination of the two, yes.

Michael Hong - Needham & Company

Okay, great. And then Ed I think you just touched on, because they are next generation Encompass, (maybe we’re a) [ph] little bit too early as I let the cat out of the bag here but what are some of the key aspects of what you’re focused on here?

Sig Anderman

So, I mean next generation Encompass is kind of us kind of stepping back and basically positioning Encompass for the next five-10 years, so it is, taking a look at all the capability we have bringing all elements further into the cloud and really looking at what our customers need today, what we’re seeing from some of the larger enterprise customers and where the markets going in terms of mobile usage, the phone and tablet, greater levels of collaboration and really extending the platform to allow for that as we go in 2015 and beyond.

So, what that really means is that we’re going to be rolling out incrementally to our existing customers as well as obviously new customers, elements of this new technology, so they'll start to see some of the benefits of it and we mentioned mobile a couple of times, mobile is really one of the first elements that are going to take advantage of some of the underlying new technology in the platform.

Michael Hong - Needham & Company

And last question is, could you share an update on kind of what you’re seeing around mortgage (CEO and CRM) [ph] activity in general?

Sig Anderman

Yes, absolutely, as we told you we expected this to be kind of a building year, we expected the reception to be good, but limited amount of revenue as we were getting deals and implementing, the reception has been really good. We have had a lot of folks attend webinars, get into the sales process, the value proposition is resonating and we do expect to see it lay a foundation this year as we move into next year?

Operator

We’ll now take a question from Brian Schwartz with Oppenheimer.

Brian Schwartz - Oppenheimer

Okay, just trying to get at the new product pricing maybe another way, asking it another way, first of all it’s great to see all this product expansion happening right now for the business, so I assume it’s opening up more dollars available for the business, so when you think about the Consumer Direct product, I know I would benefit from any perspective on what type of annual contract value left could be perceived from this type of tool versus what you traditionally sold with Encompass. Maybe to give an example, I think last quarter Ed told us that the pricing the [indiscernible] product was similar to the base pricing on the Encompass. Is there any way of making a comparable analysis somewhat type of ACD left to be expected from Consumer Direct?

Jonathan Corr

Yes, you could think of it which is called the base before you get into (averages) [ph] on applications over a certain amount, you know running in with depending on the size of the lender from $20,000-40,000-$50,000 a year addition.

Brian Schwartz - Oppenheimer

And then Jonathan, question on the sales and then question on the services, both really around productivity and where we are on the curve, [indiscernible] lot of headcount I think in both areas here over the last several quarters. Where are we in terms of potential productivity gains? Do you think those are still ahead of us here in terms of the sales force ramping as well as your service implementation group is, is that still ahead of the business here?

Jonathan Corr

Well one we’re still seeing -- we’re seeing gains and I think we’ll continue to see gains, on the services side it’s this ever balancing act, I mean when we look at, if I were to look at the standard categories prior to bringing on more of the enterprise clients, I’d say on average the overall average is coming down as we bring on more talent, we start to have a catalogue and a foundation set of services, that starts to come down on average but it’s a mix of different deployments and the enterprise deployments do take longer and so that’s kind of the overall average is still where we projected it somewhere six plus months on an average basis, but I’d say again we are seeing productivity gains there in all the categories, it’s just that we’re picking up bigger clients which is a great thing and it brings up the average a little bit.

On the sales side as I said we saw a great performance this quarter with some new talent, we’ve added more new talent, takes them some time to get up to speed, it is a more challenging market, the volume has been down, but the team is obviously performing extremely well. And I think we will continue to see gains in that area.

Brian Schwartz - Oppenheimer

Great, and then a question on the demand environment out there; I think your business is very unique in the market and the fact that you [indiscernible] to both large and midsized customers in the market. I am wondering if you can give us a sense of the trends that you are seeing in both of those two, the up market, the down market and how those segments are contributing to your growth.

Jonathan Corr

I would say that it is a nice contribution across the Board. We are now into what I say is, we used to be in two segments. We used to say strategic or large and midmarket, now we are mid-market. Large and enterprise. We are picking up some in enterprise, but the cross-section, the mix is really across the Board. Our value proposition is still resonating very strongly in the midmarket and large segment. And we are continuing to pick up folks and as our value proposition has resonated with larger lenders and as exemplified by -- we’ve announced [indiscernible] in the past and others -- these enterprise clients are really embracing this idea of total cost of ownership, software as a service, and most importantly, I think this is -- again a big driver of our success and I don’t think it’s going to slowdown anytime soon, the ever-changing regulatory environment and how difficult it is for any size lender, I don’t care whether you’re small, mid, large, really enterprise; there's so many things changing, that these folks need a partner that is completely encompassing and that they can trust, and we really have become that brand in the marketplace.

Brian Schwartz - Oppenheimer

Thank you Jonathan last question from me for Ed, so Jonathan can catch his breath here. Real quick question Ed on how retention, how churn fared within the base, some of the larger banks reported higher churn numbers in the quarter. And then the follow-up is, Ed, if you can just share any thoughts on why you decided not to raise the guidance, that there is such a strong performance here in 2Q.

Thanks again for taking my questions today.

Ed Luce

As far as the retention, we are seeing things pretty much in line with how we have modeled it internally, and how we baked it in the guidance. So we’re certainly seeing some attrition. We are seeing -- there are some banks that are consolidating either on Ellie Mae or rolling up under another platform, bigger platform. But so far it has not been terribly significant. So that’s what we are seeing today.

As far as the guidance, you know Brian we take, there a lot of inputs in to developing this guidance and you have to balance; on the one hand the strength of the pipeline that we’re working with that we mentioned all the clients that we have already got queued up, and implementation. We know those guys are going to come out and get deployed in six months or whenever and start generating revenues. We have to balance that with the continued downward trends in the volume forecasting. So we’re anticipating that there will still be continued hits on the variable portion of our revenues. And we'll make that up with the contributions from these contracts and these fixed payments that we’re layering on. So overall it works out and prudent to lead that guidance in place and we feel that those are the right numbers.

Operator

We will now move to John Campbell with Stephens Investments Inc.

John Campbell - Stephens Investments Inc.

Sorry, just one more question on the new -- the consumer direct offering, I just want to make sure I’ve got a good grip on that. It sounds like the lenders get a certain amount of leads as part of their subscription and I think you guys said, it lowers the cost of lead gen for the lenders, so I’m assuming you guys didn’t bear the cost of acquiring those leads. So first is that correct?

And then secondly, if you guys, can maybe talk to us a little bit about how you plan to approach the traffic acquisition or the sources of those leads?

Sigmund Anderman

So let me clarify, it’s very distinct from a lead solution. We’re not shelling leads here; rather we are providing technology that acts a vehicle for them to have the borrower interact with them at the beginning of the process. So you think of it this way, I could be driving folks to my site using organic marketing methods, search engine optimization, et cetera. And you know when I capture their attention, I get them to my site, and they go through a process on my site with this Encompass Consumer Direct functionality. So we’re delivering functionality. How they get the leads there, that’s kind of their responsibility. Alternatively they could go and very much by these again from a LendingTree or Zillow whoever it might be, again the process is, once I get that lead I still need to drive that lead through the application process, enable that consumer to qualify themselves for credit, price, et cetera. So it’s beyond that initial lead raising its hand, it's actually helping the borrower get through the process. That's the functionality we’re delivering, we're getting paid for. We’re not actually going off and acquiring leads for them, or paying someone, so there is no real -- there’s no cost of goods sold there for us. This is a technology play that adds tremendous amount of deficiency to a lender.

John Campbell - Stephens Investments Inc.

Got it, it makes a lot of sense, it sounds like an interface to the customer, I guess for your lenders. And then second question here is, what’s the latest average transaction per loan file, and then maybe just expectations for where that can go over the next several quarters?

Jonathan Corr

It's kicked up over six at this point. I think it’s -- in the quarter I think it’s somewhere around 6.2. I expect it to continue moving up to the right. We launched our flood services as part of TQL. This quarter we started to see traction there, and we continue to see traction in a lot of the other TQL categories as well as our traditional Ellie Mae network categories and I would expect that to continue its march.

Operator

We will now move to Brad Sills with Maxim Group.

Brad Sills - Maxim Group

Just a question on the TQL program, I know you changed your go to market here if you will, two pronged approach going after the lenders, the mega-lenders and the originators to drive adoption. Can you just comment a little bit about how that’s going and what are your expectations for TQL this year and in to next year?

Jonathan Corr

First thing is, it’s going really well. So the positioning of making it a broad value proposition for all lenders in going to market with that was the right call. We are seeing great traction there. We saw, as I just mentioned, in the previous question, we're seeing traction with the new flood services as part of that. But at the same time we are seeing more interest from additional investors as they are seeing TQL take hold with some of our lenders where we are getting unsolicited enquiries to potentially be an investor option there. So really, I think across the board, the idea the team came up within the value proposition is working. It’s working well. It’s very much, I see in line with the expectations we set out in terms of continued growth from last year and consistent with the guidance that we laid out at a high-level, and I would say that we are very excited about working element. Sig has said this a number of times. I believe it as well based on what we see. This is eventually going to become the standard way that everybody does loans. It is just the -- in a world in which lenders have to worry about loans being compliant at high quality and doing it cost effective way, I mean TQL is the answer there. And it really is this umbrella best practices approach and whether it is a couple of few years from now, somewhere more than that. I think every loan ends up going this way. So I would expect it to continue to see good progress as we move forward.

Brad Sills - Maxim Group

Thanks Jonathan, and then you called out in the comments that transaction revenue was another source of upside to expectations. Maybe just a little bit of color on what drilled that this quarter, the 6.2 number is very good. You said, flood in TQL, how about some of the other attach to some of the other categories?

Jonathan Corr

Sure, and remember some of that was assumed as the volumes, volumes in the quarter relative to Q1. But as far as the specific transactions, flood was certainly a good performer. Some client's transaction were also good. (Docks) [ph] showed some growth. E-signing on disclosure, you know one of the things that came out -- a quarter or so ago, was FHA started accepting e-signed disclosures and that has actually been a benefit on the electronic disclosure side of our transactions.

Operator

(Operator Instructions) We will now move to Brandon Dobell with William Blair.

Brandon Dobell - William Blair

Maybe focus on the top 100 lenders any sense of how you guys think about market share within that group, and I’m also curious as you think about the customers you have signed up in those top 100, have they migrated to Encompass exclusively or are there multiple systems within the same customer I guess. Multiple systems meaning you and somebody else as opposed to premise versus not.

Sig Anderman

When you get in -- so and it depends on the customer. In the very top of that 100 category, say in the top 20, you know we could very well be and we are with some customers in all of their channels, in some of them our first entry has been the retail channel, but clearly it’s been signalled to us that they’re interested in expanding us into some of their other channels the corresponding channel and our wholesale channel, so it depends on the customer, but it is very possible for us to be in one channel initially and then you know leverage that into other channels at these lenders. In terms of the market share of the top 100 I really don’t know that off the top of my head but they obviously as we said we want all the lenders and obviously the top guys do a little bit more than the next set of folks so it’s good to see our progress there.

Brandon Dobell - William Blair

Okay. I know it’s early for how professional services revenues and TQL revenues are going to flow quarter to quarter but should we expect any seasonality in those revenue buckets? I know there’s going to be moves up and down in network transactions and the variable parts based on loan volumes but within professional services and TQL any pronounced seasonality just -- or is it just going to be purely tied to implementations then TQL is on its own schedule.

Sig Anderman

I don’t really see seasonality in implementations, the seasonality that I expect we’ll see and that’s kind of built into as you just said Brandon, the volumes in Q1 and Q4 that we’re starting to go back into a -- obviously we’re not going back, we’re in a purchase market, and so it follows that normal cycle where you tend to dip a little bit in Q1 and Q4 and you have a more robust Q2 and Q3 but in terms of seasonality around implementations and things related to that, we haven’t seen historically.

Brandon Dobell - William Blair

Okay and then maybe for Ed, and you back to last quarter’s call and your expense commentary about this quarter and balance of the year; it doesn’t seem to have ramped as fast as I guess others have modelled it. Thinking about the transition from 2Q to 2Q and expense lines, it’s a pretty big jump up in some of those lines to get down to the EPS number. So is there other [indiscernible] expenses that are related to the data [indiscernible] in the year or related to other product roll out, something like that, that got pushed from Q2 to Q3 or you’re expecting to spend a whole lot more money in Q3 and that always the plan.

Ed Luce

Well not so much the latter.

Brandon Dobell - William Blair

Okay.

Ed Luce

Although we did expect it to ramp, continue to ramp through the third quarter. I think the biggest item there is that it is taking longer to bring some of the folks on board that we’re looking for and in concert with that we did a fairly significant amount of hiring right towards the end of the quarter, so we haven’t seen their full quarterly financial impact yet we will see it in Q3. But June and to some extent May were both pretty heavy hire months.

Brandon Dobell - William Blair

Okay.

Ed Luce

I think it’s just timing, Brandon. And it’s consistent with our plan as we said before that to accelerate in all areas and accelerate some of the investments in SaaS and infrastructure and that really it was a little more back loaded in terms of getting people on board in the quarter I think….

Brandon Dobell - William Blair

Okay, then final question, given headcount stats, appreciate those, doesn’t sound like the sales force headcount has moved up an awful lot over the past handful of months. Is that -- am I right in saying that or was there some headcount for sales buried in the 33 that you added, that you mentioned there Ed.

Ed Luce

You’re right, Brandon, we did most of the sales force expansion earlier in the year and it’s been heavily in the R&D areas and a little bit in G&A, but we’re not quite there yet I think on the sales and marketing bucket but most of that was done earlier.

Operator

And that’s all the time that we have, I’d like to turn the call back over to management.

Sig Anderman

Well, thank you all so much for visiting with us today and we look forward to seeing you next quarter.

Operator

And once again that does conclude today’s conference. We thank you all for your participation.

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