Asset-Light Business Model
Apparently, customers have been responding well to that value-creating business model. Ellie reported in 2012 that it now has 74,000 active users on its Encompass software, a 40% increase over 2011; 41,000 of these users are utilizing the company’s on-demand Software-as-a-Service (SaaS) platform via the Ellie Mae Network, which is one of the keys to the development of this business.
SaaS is really and truly built by the network effect. The Ellie Mae Network allows users who are already using the Encompass software to immediately order services for various transactions (some examples are credit, flood, title and appraisal reports) from other providers. Each time a user orders a service over the network, Ellie Mae charges a transaction fee.
Once users get set up on the network, the cost of providing services to them is very low. Visa Inc (NYSE:V) and eBay Inc (NASDAQ:EBAY) are living proof of the power of the network effect. Visa’s number of cardholders rose from 94 million in 2003 to 104 million in 2011. Over that same time period, the company went from being unprofitable to raking in over $3.6 billion a year in earnings and achieving a net margin of over 40%. eBay has increased its number of PayPal users to 121 million at the end of 2012, yet has maintained net margins of nearly 20% for the better part of the past decade. If you build it, they will come..
Ellie Mae Inc (NYSE:ELLI) is already seeing similar signs of the network effect taking root. Its revenue obtained from the SaaS platform increased 70% in 2012 and now accounts for 89% of total revenues. Alongside the impressive revenue growth, they managed to also increase gross margins from 72% to 77% year over year. Average revenue per user on the Ellie Mae Network rose 41% and is significantly outpacing the associated costs.
I read into this that the company’s business model is working effectively. Ellie Mae has established a platform that is valuable and is succeeding in attracting users. Over time, the costs flatten out and the transaction fees (revenues) start to drop directly to the bottom line. As an added bonus, as users become more and more familiar with the site, the switching costs become higher for them to leave for something else.
Gearing Up for Growth
Ellie Mae has a huge opportunity to capitalize on the resurgent housing market. It’s doubled its customer acquisition team in the past few quarters, increased its capacity for data, and it’s building out its Ellie Mae Network.
I like what I see so far. If Ellie Mae can continue to attract users and keep them using the site, this company’s growth is far from over.
The article Why Ellie Mae Is Set to Soar originally appeared on Fool.com.
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