Ellie Mae Sell-off Overdone

And on little, if any, new information..

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ELLI over the next 72 hours. (More…)

There has been a rather massive sell-off going on in the shares of Ellie Mae (ELLI), what’s going on?

(click to enlarge)

First, the sell-off was sharp, and on high volume, and the shares broke through the 200-day moving average like it wasn’t even there. When something like that happens, one has to take notice.

The immediate catalyst seems to have been a downgrade from William Blair (from buy to neutral), on the following grounds:

  • The decline in refinancing existing mortgages will outweigh the increase in new mortgages for 2013
  • The conversion of on-site customers to Ellie’s SaaS business is slowing.

The curious thing is, nothing of this is actually new. If you read last quarter’s conference call transcript (Q3 CC), you would have known that Ellie Mae itself has based 2013 guidance on a 20% headwind in the market. The company also argued that more than half (53% to be exact) of its on site license holders (who host the software package on their own servers) have now converted to their SaaS service.

So by the law of large numbers, growth will have to slow down pretty soon, we can’t fathom why this has apparently been such a shock to investors to generate a 30%+ sell-off in less than two weeks.

One might also want to keep in mind that they have a backlog of users who are not yet active and have to be activated. In Q3 they booked about 6,800 new SaaS seat licenses, including about 1,100 new users and 5,700 existing users who converted from license versions of Encompass and DataTrac (a company that Ellie Mae took over in 2011) or existing customers who added more users. Very few of these users were activated during the quarter.

Even before the William Blair downgrade, analysts were expecting a 10% decline in earnings in 2013 versus 2012, but this is due to taxation and a share sale (3.6M shares in July, but the cash proceeds of $56M are still on the balance sheet, which records $93.9M in cash and cash equivalents and the company generates positive free cash flow and has no debt) , these are issues that have been known for some time.

[Read on here]