Ellie Mae's (ELLI) Jonathan Corr on Q2 2016 Results - Earnings Call Transcript

| About: Ellie Mae, (ELLI)

Ellie Mae, Inc. (NYSEMKT:ELLI)

Q2 2016 Earnings Conference Call

July 28, 2016 4:30 PM ET

Executives

Alex Hughes – Investor Relations

Jonathan Corr – Chief Executive Officer

Ed Luce – Chief Financial Officer

Sigmund Anderman – Founder and Executive Chairman

Analysts

Ross MacMillan – RBC

Saket Kalia – Barclays Capital

Richard Baldry – Roth Capital

Brian Schwartz – Brian Schwartz

Patrick Walravens – JMP Securities

John Campbell – Stephens

Brandon Dobell – William Blair

Operator

Good day, ladies and gentlemen, and welcome to the Ellie Mae Inc Q2 2016 Earnings Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the floor over to Alex Hughes, Investor Relations. Please go ahead.

Alex Hughes

Thank you, operator. Good afternoon, and thank you for joining us on today’s conference call to discuss Ellie Mae’s second quarter 2016 results. This call is being broadcast live over the web and could be accessed for 90 days in the Investor Relations section of Ellie Mae’s website www.elliemae.com. Joining on today’s call are Jonathan Corr, Chief Executive 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 the company files from time to time with the SEC, 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 Chief Executive Officer, Jonathan Corr.

Jonathan Corr

Great, thanks, Alex. Good afternoon everybody and thanks for joining us today. Hope you all are having a great summer so far. We had an outstanding second quarter as we continue to exceed expectations across bookings, revenue and profitability and made further progress towards our vision to automate the entire mortgage origination process.

Banks and mortgage lenders continue to embrace encompass as they seek to improve their compliance, loan quality and efficiency through our all in one platform. Q2 was a tremendous quarter on a number of fronts. Seat bookings remain robust with 13,000 seats booked bringing the total contracted users to nearly 193,000. This number exemplifies the robust nature of our pipeline and the market demand for encompass.

Since we completed virtually all of our on-premise migrations last quarter, all of this strength came from new customers and existing customer additions. Furthermore, we finished the quarter with a very healthy pipeline. We continue to see demand from a broad array of financial institutions across each of our segments, including midmarket and large enterprise and really feel great about our pipeline going forward.

We also continue to generate strong growth in profitability from our model with Q2 revenue increasing 37% year-over-year to $90.1 million and adjusted EBITDA margins coming in at 34% of revenue, demonstrating the profitability of our vertical SaaS model. We also drove significantly higher ARPU with average revenue per user increasing 14% year-over-year to $601 in the second quarter. This was led by greater closed loan activity, increased transactional revenues and ongoing adoption of services.

At the same time, we continue to make progress with our next generation platform, which we believe positions us to deliver even greater value to our ecosystem. Next gen encompass will bring an open, fully programmable cloud collaboration platform to our customers and partners and enable them to build, deploy and run innovative highly secured solutions.

By creating an open platform for the industry, we’re also building even stronger and stickier network around encompass to both lenders and industry partners, which we believe will further Ellie Mae’s market leadership. This month, we released encompass 16.2, which delivers many of the foundational components to allow some of the next generation encompass releases planned for later this year into early next year.

Encompass 16.2 also introduced a number of new and enhanced integrations with Freddie Mac and enhancements for the total quality loan program including broadened strategic partnerships with both First American and DataVerify. As well as key updates to our encompass product and pricing service. And finally, the loan environment continues to prove more favorable with expected origination volume now projected to be around 1.7 trillion to 1.8 trillion for the full year.

Furthermore, mortgage originations remained weighted to purchases as can be seen in our June origination insight report with 65% of closed loans being purchased and forecast is expected to remain purchase dominant for the foreseeable future, which is a favorable trend for our customer base that benefits in a purchase market. As we continue to drive long-term growth, we are focused on a number of strategic objectives, including expanding our customer base, deliver a new solutions to our customers, broadening our network of service providers and partners and rolling out our next generation platform to create value and stickiness to our ecosystem.

With a significant outperformance that we have seen in user growth through the first half of the year, we’re aligning our investments in both our datacenter and infrastructure to better prepare for this greater user growth, which will result in slightly more CapEx in 2016. We believe this will further positions us to capture a growing opportunity ahead. In the meantime, we continue to benefit from secular trends driving our end market, such as the market shared shift of origination volume from the top 5 national banks to both large and midsized lenders.

We’re also seeing favorable trends in other drivers including ongoing regulatory demands, increasing costs of origination and as I said an improving housing market. With these continued tailwinds in place, and our strong seat bookings, we entered the second half of the year with excellent momentum and believe we are well positioned to grow our continued market share. As a result, we are raising our guidance for the full year.

With that I’ll turn the call over to Ed to discuss our financial results and outlook in more detail.

Ed Luce

Thank you, Jonathan. Good afternoon, and thanks again to everyone joining us today. As Jonathan mentioned, Q2 was an excellent quarter and we heading into the second half of the year with strong momentum. Total revenue for the second quarter was $90.1 million, an increase of 37% from the second quarter of 2015. Contracted revenue in the second quarter increased 39% year-over-year to $49.6 million. This represents approximately 55% of our total revenue in the quarter. Revenue per active encompass user increased 14% year-over-year to $601 as Jonathan noted that’s for the second quarter.

Seat bookings remain very strong despite completing virtually all of the on-prem conversions in the first quarter. We again grew our market share during the quarter with total active encompass users increasing 21% year-over-year to 153,000 and contracted users increased 36% to nearly 193,000. Implementation and professional services revenue also increased year-over-year, driven by the booking and on boarding of both midmarket and enterprise lenders.

During the quarter, professional services represented approximately 7% of total revenue and that’s consistent with where we expected to be for the full year. Gross margin for the second quarter was 68%, up about five point sequentially, and flat year-over-year. As we said last quarter, we expect gross margins to run higher with revenue seasonality and to be in the mid-60s as a percentage of revenue for the full fiscal year.

Net income for the second quarter was $10.6 million, or $0.34 per diluted share that compares to $7.6 million or $0.25 per diluted share in the second quarter last year. The tax rate on a GAAP basis was approximately 37%, slightly up from the first quarter. We continue to expect our full-year tax rate to be approximately 35%. On a non-GAAP basis, adjusted net income for the second quarter was $20.1 million, or $.64 per diluted share, compared to $14.9 million and $0.48 per diluted share in the second quarter of 2015. Adjusted EBITDA for the second quarter was $30.9 million compared to $22.6 million for the second quarter of last year.

Shifting to the balance sheet and our cash flow, cash and investments finished the quarter at $133 million, up $19 million from the prior quarter. Second quarter cash flow from operations was $32 million and is expected to be about $105 million for the year. Q2 CapEx was just under $12 million and is expected to be about $65 million for the year. As Jonathan noted, due to their greater user growth that we are saying we continue to align our investments in the data center and infrastructure to prepare for this higher growth as a result, free cash flow is now expected to come in between $40 and $45 million for the year.

Our 2016 guidance takes into consideration industry forecast for mortgage origination volume. We use the composite estimates of mortgage origination volume as published by Fannie Mae, Freddie Mac and the mortgage bankers Association to forecast certain portions of our business for 2016. This composite now shows an estimated 4% increase in origination volumes from 2015, the detailed blended forecast data can be found on our supplemental data sheet that is posted on the investor relations section of our website.

Given our strong results for the second quarter, and a healthy implementation backlog. We are raising our guidance for the full year 2016, we now expect revenue to be in the range of $338 to $341 million net income is expected to be in the range of $27.5 to $28.5 million, or $0.86 to $0.89 per diluted share. Adjusted net income is expected to be in the range of $63.5 to $66 million or $2 to $2.06 per diluted share. And adjusted EBITDA is expected to be in the range of $99 to $103 million.

For the third quarter of 2016, revenue is expected to be in the range of $90 to $92 million net income is expected to be $8.7 to $9.2 million, or $0.27-$0.29 per diluted share. Adjusted net income is expected to be in the range of $17.7 to $18.9 million, or $0.56 to $0.59 per diluted share. And adjusted EBITDA is expected to be in the range of $0.28 to $0.30 million.

On the investor relations section of the Ellie Mae website, we have posted our investor presentation where you can see the target model, that we are growing into. With a significant opportunity ahead, we remain comfortable in our ability to drive our targeted 25% plus topline growth over the next few years, while seeing increasing leverage in adjusted EBITDA which is the primary measure of profitability that we focus on. We expect to reach adjusted EBITDA range within the next two years.

As we’ve mentioned in the past. We are also targeting gross margins of 70% to 75%, but because of the investments we are making to keep up with our sales success. Our user growth and the capital investments that we are making to drive future growth it will take us slightly longer.

And finally, before we turn to your questions, I would like to mention that we will be presenting at the 19th annual Oppenheimer Technology, Internet and Communications conference in Boston on August 9.

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

Question-and-Answer Session

Operator

Thank you very sir, [Operator Instruction] and first will take Robert Simmons with RBC.

Ross MacMillan

Thanks yes, it is actually Ross MacMillan from RBC. Couple of questions, this one for Ed, first of all when we look at adjusted EBITDA versus cash flow from ops this year it is a little bit different than I think the normal relationship and you know, last year I think. Cash flow from ops was ahead of that adjusted EBITDA. I think this year its probably going to be a little bit closer. Can you just may be help us either on the first half or for the full year what the puts and takes are between the two. And then I have a follow-up for Jonathan.

Ed Luce

Oh sure the cash flow that were generating is primarily a relationship obviously of the different kinds of margins on the products that we’re selling in that particular period. We had a good period in Q2, with strong volumes and the high-margin transactions and success fees as well that contributed to the larger number in the quarter we’re expecting some degree of that also in Q3 and Q4. As you can tell from the guide.

Ross MacMillan

Okay I’ll also call back offline just want to make sure I understand that a bit better. May be one for Jonathan, hi how are you. Very good quarter especially on new seat bookings I just had a – I guess a question on that obviously there is probably a small residual conversion from that on-prem base but if we think about new customers versus add-ons. May be you could just talk qualitatively about that, what I am trying to understand, is there still a strong backdrop of add on business going on within the base and I know the comps they are tougher because I think we’ve had some strength there last year ahead of TRID. So maybe just some color on what’s happening there. Thanks.

Jonathan Corr

Yeah great question. So you are absolutely correct. The migrations were done, so of that 13,000, that 13,000 is all new users and an add-ons. A combination of the two and I would actually say that it’s really quite healthy, both in terms of new users expansion of existing customers and really quite healthy, pretty much across the board.

If you would have kind of look at that qualitatively a portion of that is from enterprise, a portion of the middle is from larger and a portion is from mid-market. So obviously the deals tend to be more down the low-end, but if you are thinking about it. It’s been healthy really across every aspect of the customer base and both in terms of new user expansion as well as our existing customers growing and that’s what the pipeline looks like going forward as well.

Ross MacMillan

Great may be one last one just follow up for Ed on the comments on gross margins taking a little bit longer to get into that 70 to 75 range. Just so I understand it, I think originally we were thinking about that for next year, but also getting to the target EBITDA existing next year. Can you just recap on kind of those two elements and if it is taking longer. What’s the approximate timeframe to get there?

Ed Luce

Well we are right there at the adjusted EBITDA the margins as you can see. And will be in and out of that range, well we expect to be in that range comfortably on an operating basis within a couple of years. The big difference is that on the gross margin of course it it’s all the things that we are charging in to cost of sales and one of the larger components now in cost of sales is becoming a depreciation flow from our next generation project. Next generation Encompass is most of that is being capitalized. Lot of the depreciation hits the cost of sales account, and so it’s going to take longer for us to get that through our system if you will.

Even despite that, and other investments, though, including a slight increase in CapEx this year that Jonathan mentioned the gross margin should hold very nicely in that 66 to 68% kind of range in the near term.

Ross MacMillan

That’s great. Congrats again on a very strong quarter thanks a lot.

Jonathan Corr

Thanks so much Ross.

Ed Luce

Thanks Ross.

Operator

All right moving on well hear from Saket Kalia with Barclays Capital.

Saket Kalia

Hi guys thanks for taking my questions here and very nice results for the quarter.

Jonathan Corr

Well, thanks so much good to hear from you.

Saket Kalia

Yes So Jonathan may be I will start with you so you talked about the ongoing regulatory headwinds for your customers, can you just talk about a couple of those and sort of when the timing for those might start to impact your customers. And how you think your customers might respond when it comes to evaluating their loan origination system.

Jonathan Corr

So for our customers I’m not worried about them evaluating their system. I think they are on the market-leading solution they are ones that really comfortable about our ability to deliver on the regulatory aspects. I think that the most interesting opportunity is with the market out there the big portion of folks we don’t have yet that have grappled with regulatory change, appliance change over the last five, six years and you’re going to see it hit again, you know relatively soon.

There’s going to be some additional interpretations that come out from the CFPB at the end of this month that I think will drive some additional changes kind of let’s call it CFP part two. And so that’s the short-term. We’re also going to see some things that will roll out probably at the back half of 2017 into 2018 we’re still waiting for the full timing from a Fannie Mae and Freddie Mac on a total revamped loan application in terms of capturing more data, such that they can better evaluate the risk as loan to purchase as they go into the secondary market. Obviously a big aspect of things that people are focused on in terms of quality.

And then you have the plans around the home, Home Mortgage Disclosure Act, the how many changes that are being driven by the Consumer Financial Protection Bureau, CFPB that are slated to roll into a fact through 2018 in 2019, but folks will start to really focus on making sure they have everything as we go through 2017. So a lot of things that are going to keep these guys, these folks busy, which I think will be again a continued tailwind to us picking up market share.

Unidentified Analyst

Sure, sure. And then may be a follow-up for Ed. Just on the CapEx item Ed, can you just talk about whether we should view this as really a one-time investment here in 2016. Really to build through that next-gen of Encompass, or is this a level that you think you need to stay out to really maintain that capacity for larger customer base?

Ed Luce

Well I think this is a level that you should expect to see while we’re still developing this next-generation platform. So I would expect something like this for next year, as well, although we haven’t finalized those plans yet. Going forward this – it may be an appropriate level for us. It will certainly draw as a percent of revenues as we move into the next few years. But for now I think in the near-term this is a good number to you.

Jonathan Corr

I think definitely you think about the for 2017 a baseline of that is going to be infrastructure. And then again this initiative will start to the tail down as we go into ‘18, but if we see new opportunities to expand the market will look at that point. But I think that’s a good way to put it.

Unidentified Analyst

That’s really helpful. One quick housekeeping question if I could squeeze it in. Ed can you just talk about the closed loan per active seat metric roughly what that was this quarter?

Ed Luce

That was approximately 1.5 for the quarter as an average.

Unidentified Analyst

Great. Very helpful guys and thanks again.

Jonathan Corr

Thank you.

Operator

All right our next question comes from Richard Baldry with Roth Capital.

Richard Baldry

Thanks. The ARPU stepped up pretty significantly in the quarter broke up to a pretty strong new high. Can you talk a bit about how much of that’s being driven by volume, seasonal volume versus the adoption of sort of the ancillary services from other services from yourself and third-parties?

Jonathan Corr

Yes great question Rich. Yes it was a very healthy growth in the in the ARPU. I think you can think about that as probably a little under half of that, we tied to let’s call it the loan productivity or volume or expansion right because obviously ARPU is very much tied to that.

And then the other half, I think you know had a healthy split between just ongoing adoption of services and the continued adoption embracing of automation of services to the Ellie Mae network. It just continues on the trajectory that we’ve seen in terms of a healthy set of progress that’s incrementally grows every quarter and continues on.

Richard Baldry

And if I look over the past two years you’ve roughly doubled the contracted user base and similarly stepped up the rev per user. When you go back to sort of re-negotiate terms with the vendors you deal with, now that you are so much bigger, can you talk about the trending, do you think that your revenue shares when you think about that is improving materially? Do you thank that’s something that develops down the road still sort of ahead of you? Are you starting to see some ability to kind of drive price better yourself? Thanks.

Ed Luce

So I break it into two buckets. And one is the relationships with the service providers, the partners. We have actually continued to see that go up as we’ve created a larger and larger customer base for them to take advantage of in terms of ordering across the platform. And as we do that and add more data to the mix, we’re increasing value and we’re able to basically get more revenue per transaction in various categories as we go forward, as well as add new categories. So that’s healthy and it just keeps growing there.

As we talked about historically, we have for our existing customers on the lenders on our platform as opposed to the service providers that has increased over time, both on a per user basis, where we’ve kind of gone from 50 we started, a number years ago with this model, the success-based pricing model to 75 at this point. I expect to see that continue to grow. That has grown along with the amount of value we brought to the platform. And that also holds true on the average closed loan.

So as we go forward and we roll more and more capabilities into the solution, we use that as an opportunity to bring up the value over time. So it’s more about delivering greater value and sending that message to both the partners and on the customers rather than using market power. But it does get into the ID, you can think of it as the more people you have on the platform, the greater the network effect, the greater value we can create for everyone and ultimately greater efficiency and greater economics for Ellie Mae.

Richard Baldry

Great congrats on a great quarter.

Ed Luce

Thank you.

Jonathan Corr

Thanks Rich.

Operator

Moving on with Oppenheimer our next question comes from Brian Schwartz.

Brian Schwartz

Yes hi thanks for taking my questions this afternoon. I’ll follow the group with really terrific job on the quarter guys.

Jonathan Corr

Thank you Brian.

Brian Schwartz

I’ve got two questions for Jonathan, and then one for Ed and one for Jonathan. One question kind of what’s out there in the market and then a strategy question. So the question I had on what you’re seeing out there in the market. It looks like the business you’re doing extremely well here in the op market. And I think we did have a sense of that. But in your introductory commentary, you rattled off about being pleased with the adoption of the other services and kind of building upon the ARPU question, prior, to me that seems like a pretty significant vote for the concept of having an integrated suite. And when I talk about integrated suite, I’m talking about the core originations, management having your supplier network, as well as the other services, the productivity services all from the same vendor.

So I’m kind of curious about the –how the discussions are evolving if it tilts it all towards using one vendor for all these solutions. I’m just trying to get a sense if may be the network or those other services are potentially opening up front doors here for the platform?

Jonathan Corr

There’s no question that and we’ve talked about this in the past Brian that we have tremendous insight into what kind of activities happening across the network in terms of between our lenders and the business partners on the platform. Both in terms of more technology-based transactional services, as well as just overall services like appraisal, and title, et cetera.

And that gives us gives us insight into where we might invest, what opportunities might be out there we’re obviously seeing a lot of the opportunities out there. And whether we should be building things out further partnering or doing acquisitions. And when we think of it in the realm of the big picture, ultimately what we want to do is make sure every aspect of the process is automated. And by doing that we can drive out inefficiency and bring greater economics to the platform. And we do have situations where we are providing a service, gaining a certain amount of revenue and we have a similar service on the network from other suppliers. And it works very, very well. The other thing you asked about the services I mean things that we continue to see having a really great adoption and whether it would be AllRegs or our own product and pricing service on the platform or things like income verification, fraud detection, and even our newest CRM all continue to move in a direction that is driving greater and greater ARPU. So you we are really quite excited about that.

Unidentified Analyst

Jon, that’s a good segue into the strategy question that I had for you because your thesis to take down the EBITDA margins to ramp your sales and support headcount. It is really paying off for the bids in us, but I’m kind of wondering if you think it all. If the growth is constrained at all by the ability to staff off the sales and services organization and the reason. I’m asking that is because we are seeing very positive ARPU trends for the business. We know about the leadership position in the differentiation and the good secular trends in the market that you’re selling into. We’ve validated it time and time again with our research so I’m just wondering would it any sense to slow down the EBITDA margins rebound progression that you’ve guided soon or expecting here over the next 2 years and maybe keep the investments cycle going on for a bit longer.

Sigmund Anderman

That’s a great question, Brian, I think what the beauty of this is the such leverage in this vertical model.

And so you know, unlike some other businesses in a horizontal fast we don’t really nearly have the same level of sales and marketing expense that some others do we know our the target base were we are able to have great leverage selling in and driving more adoption of services into that customer base and again this is virtuous cycle of we don’t have to do nearly the kind of work to bring in new business because it just with a market leader great word-of-mouth great virtuous cycle I do think we’re going to be in that range of adjusted EBITDA very soon the 35 to 40.

We obviously we could expand that even further potentially if we chose. I think we’re going to try to keep it in that range and take all the other dollars and margins that’s created out of it and continue to drive the growth that the 25 plus percent. I mean, that’s a lot of the effort it’s going into the next generation. But I think the nice thing that we can. This is a unique business model and that we can try both growth and profitability through the leverage and in a very healthy fashion we’re always adding sales and marketing channel but I have to add it in an [indiscernible] rate. That’s what I love about this model. So great question.

Unidentified Analyst

And the one question I had for Ed. Ed I’m just curious about your visibility here tonight. With the strong bookings and the strong contract that our backlog trends that the business is showing today how would you characterize the level of visibility as you look forward into next year. I’m just curious. If it is normal or perhaps the it can even batter as the business is scaling. Thanks.

Sigmund Anderman

Sure, Brian. Of course, the visibility gets better the more folks we put on the platform and had the some nice bookings quarters over the last three or four quarters in particular that all helps us it certainly helps with the fixed contracts. The way we sell it and even the success elements or the per loan fee upsides that are built into these contracts. Even though the network transactions of all these additional clients are giving us more data points to understand their rate of adoption on the different services and understand their rate of usage of the network. So I’d say the visibility is getting better all the time.

Unidentified Analyst

Thank you for taking my questions today.

Sigmund Anderman

Thanks Brian.

Operator

Moving on we’ll hear from Patrick Walravens with JMP Securities.

Patrick Walravens

Great. Thank you and congratulations. I have two, my first one is, is there an opportunity to use Amazon Web services or maybe Azure or maybe in the Google cloud platform to host parts of the next generation platform and is that may be a way to help to take the cost down.

Sigmund Anderman

That’s a great question, fee and with Pat and we are evaluating that we are already dabbling a little bit in the public cloud and I expect that will be in a hybrid operation over the next few years and then we’ll really evaluate whether to what extent we go to the public cloud but there’s just so many advantages in particular, just the flexibility which you can run. And ultimately I do think you cannot take out – you are going to be shifting expenses from capital to more operating expenses, but this does a lot of benefits to the public side of things.

Patrick Walravens

Great. And then big picture for you Jonathan and so you know with the new of the day, which is Oracle buying net suite I think that public SaaS company acquisition in 2016. So I just love to hear your thoughts about one or why the consolidation might be happening now. And two if its somehow different from vertical software than for horizontal, you touched a little bit on that second part earlier but your thoughts yet.

Jonathan Corr

Yes, so I’m a buyer not a seller. It is interesting. I was actually chatting with the folks about this, I mean what we are obviously seeing the attraction of the SaaS model across the board and we are seeing the fact that these more established slower moving players or slower growing players are jumping into horizontal SaaS to help drive their models because it is not the future it’s the current and it’s the future no question comment combination. On the vertical side, I’ve seen some deal done there. Obviously we saw deletrack. I think a couple of years ago maybe some others.

I think the difference in my mind again with say some of the horizontal places they have growth but in some degree they don’t have the scale to get to path to profitability. And so maybe really it make sense for us is a vertical SaaS play we have that profitability. We have that combination and we just have this great runway. So we don’t see anything happening necessary with us per se.

Patrick Walravens

Great. Thank you.

Operator

[Operator Instructions] Next from Stephens we will hear from John Campbell.

John Campbell

Hey, guys good morning. Great work on a quarter.

Jonathan Corr

Thanks, John.

John Campbell

Just on the revenue guidance can you guys maybe unpack that a little bit for us just some of the moving parts may be if you could quantify or just maybe directly talk just something where the race came from is it more of the high origination market or is it accelerated bookings or expectations for higher bookings this year?

Jonathan Corr

You want me to take that – so I think there is a couple aspects to it obviously part of that is based on what we just be right in terms of the year, right so we did had a great performance in Q2 that obviously carries through to the full year, as we look out to the second half third quarter. It looks to be still pretty robust in the third quarter. And then following its normal seasonality as we go into Q4. So I would look at the aspects of the bookings that we saw in Q1 and Q2, especially the Q2 elements that will tie into that some aspects of volume obviously aspects of B in Q2 and really ongoing adoption that tends to be a little bit better than we’ve seen. And combine all those together and it allows us to really jump up the guidance by the I guess the $9 million to $12 million race you put out there.

John Campbell

Okay, that’s helpful. Thanks for that. And then on the mix of bookings I think you guys talked about that a little bit about some of the components of the bookings. Just curious about maybe the mix of the size of lender, are you guys still seeing kind of higher weighted towards enterprise level?

Jonathan Corr

No, its pretty healthy across all three channels. So nice little handful of enterprise deals nothing greater than 600 users in a deal this particular quarter just to give you some sense there, a much greater number of large deals. And then a really big array of midmarket deals, which includes a lot of community banks, credit unions, so we’re just seeing health across the board. And if I were to kind of swag it qualitatively, I’d say, really the number of seats that we got fell pretty evenly into those buckets, but obviously the number of deals is going to be much greater at the low end and then at the high end, so it’s health across the board.

And you when you think about the market, right, we’ve got probably – I think we’ve talked about it in the past, somewhere between 1,700, 1,800 lenders. There’s another 5,000 or more that are out there originating in the industry that fall across all the segments I just talked about. And a lot of banks, a lot of regional banks, community banks, credit unions, as well as independents out there, and we are just doing really well across the board.

John Campbell

Okay, that’s helpful. And then last one from me, I mean, looks like some of the SaaS contracted rev is accelerating last two or three quarters a little bit faster than the contracted users. Is that simply pricing or is that better collections or what explains that jump?

Ed Luce

That, well, let me think about that for a second. Well, combination of things would happen there, right. So we’ve got new customers that are coming on, right, at obviously the current contracted user price points, the $75, right, four guys are coming on with – without product and pricing in the higher number if they have product and pricing. You also have – we’re basically started negotiating the cycle of renewals. And we’ve been doing this and we talk about three-year to five-year contractor, average for your contract.

Lot of renewals taking place. Lot of those guys were new when came in when the price point was at $50 or $60 for current user. As they come in, we’re bringing them up, bringing them up to the total value, the current price of the contract, and that just kind of comes right through. So that’s how we think about that.

John Campbell

Okay, it’s very helpful. Thanks guys.

Jonathan Corr

Thanks, John.

Operator

Moving on from William Blair, we will hear from Brandon Dobell.

Brandon Dobell

Thanks. Afternoon, guys.

Jonathan Corr

Hey, Brandon.

Brandon Dobell

Couple of ones, maybe Ed, first I just want to make sure I understand how relative the comments you made in last quarter on the broad brush strokes for 2017. How your comments about gross margin investments would impact or relate back to those comments from last quarter’s call? I think you talked about $400 million plus and then EBITDA margins closer to 35%. I’m assuming that the revenue targets still makes a lot of sense, but the EBITDA margins, maybe a little dampening relative to what you said before.

Jonathan Corr

Yes. The revenue targets were – we’re still targeting – comfortable with a 25% growth rate at least on – where we end up this year.

Brandon Dobell

Okay.

Jonathan Corr

And the EBITDA margin is going to be right in that 35% plus range. So that’s not changing at all, that’s going to be right in line with that trajectory. I think that Ed was touching a little bit on the gross margin right now.

Ed Luce

Right.

Jonathan Corr

And we really run our business; we focus on the adjusted EBITDA, that’s how we run it. We kind of focus on the cash flow generation et cetera. But gross margin is where – Ed, expense is on you, you want to touch on it?

Ed Luce

Yes. Brandon, the gross margin is the area where we’re reporting a great deal of depreciation from the capitalized next-generation product. We’re starting to release parts of that projects now to the market.

Brandon Dobell

Okay.

Ed Luce

And so that’s where the charges will go. Still though, you should see something pretty close to what you’re seeing now. We should be in that mid high-60%s range over the next of couple years. It’s really, I mean, again aligning with – positioning ourselves for further growth in terms of the opportunity there, in the terms of the capital investment. And in the capital infrastructure that I mentioned, which is continuing to outperform in terms of new sales and users just investing ahead of the curve there to keep up with that that real success, that is just hitting on all cylinders.

Brandon Dobell

Right. Okay. And maybe a sense of how the new customers you guys are adding, are impacting professional services revenue? I know it’s going to be in the queue, so I won’t ask you what the number is, but we think about that chunk of revenue looking up at the next couple of years. Given the complexity of the offering now and how broader it is and what you guys keep adding to it, does that revenue number kind of stays at a certain dollar figure, does it grow long with user count? There’s a plenty of sense how to take about that as opposed to the contractual faster than revenue.

Ed Luce

Yes. I think at sometimes it’s going to run about 7% for the year. I might go up smidge and more as a percentage, but expected to run in not only dollar figure, but rather as a percentage of revenue. And it holds true and it’s not I think complexity, I mean that’s one aspect of it, that’s not – but really what we see, again, it holds very true what I said about seat bookings. In that if we really look at where the services is being consumed, whether it’d be an implementation or education or enterprise tech support, it’s really happening across all the channels. So it’s happening across midmarket, the large and the enterprise.

Brandon Dobell

Okay.

Ed Luce

Obviously few accounts et cetera, but it really I think it’s a function of a seat consumption or seat acquisition. And it goes to a percentage that single digits of revenue that we’re providing in terms of services to make these guys successful on the software and what I kind of call whole product delivery, all though it is my turn to [indiscernible] that we are delivering everything that our customers need to get be successful, realize the return on investment, so it’s just there to make them successful.

Brandon Dobell

Got it. And then final one from me, I guess how impactful are the CRM efforts within the revenue per user trends we’re saying? Is it making a difference still too early given the size of that? Or the dollar size of that offering related to the dollar size of encompass? Or I guess as you answer that how we think the impact of that particular offering or part of offering on the growth trajectory 2017?

Ed Luce

Yes. I mean, right now, I mean, we’ve only been added a bit. We had some success there, actually a good success, but it’s a very, very modest amount of revenue.

Brandon Dobell

Okay.

Ed Luce

And as you can imagine, right, it’s a SaaS offering. Even as we sign folks up, it takes time to cascade out there. And we look at that as not a hockey stick type thing, kind of just as we introduced other services in the past whether we’ve actually built them ourselves, acquired them or brought them in as partner solution that we’re reselling, it’s a steady kind of penetration into base over a number of year. So I expect to see some uptick as we go into 2017, but it’ll still probably be relatively modest portion for a couple years, I mean, you can fill that out.

Brandon Dobell

Okay. Okay. Perfect. Thanks.

Jonathan Corr

Thanks, Brandon.

Operator

At this time we have no further questions from the audience. I’d like to turn the floor back to Mr. Jonathan Corr for any additional or closing remarks.

Jonathan Corr

Well, you know what? Thank you all for being here. I appreciate the support. Hope you guys are having a great summer as they said. You get some nice plans with your families for August, and will look forward to talking with you all after the Q3 results. So have great one.

Operator

Ladies and gentlemen that does conclude today’s conference. We appreciate your participation. You may now disconnect.

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