Almost half of all U.S. mortgages use Ellie Mae software.
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Earlier this year it was announced that private equity firm Thomas Bravo had purchased Ellie Mae for $3.7 billion, causing its shares to jump up 21 percent overnight (to $99.45 per share). Since about forty percent of all mortgage loans in the U.S. use Ellie Mae software, a market share which has grown considerably since the aftermath of the housing crisis, they have become a dominant player in the industry by just quietly staying in the background. I spoke with CEO Jonathan Corr towards the end of 2018 about how Ellie Mae has managed to survive during the downturn and the pivots they made along the way to stay afloat.
Dobson: Can you give a brief history of how things started?
Corr: We started off doing websites for mortgage brokers. At the time, mortgage brokers dominated the market, in terms of origination. Within a couple years, we realized that wasn’t how we would create massive efficiency. So we developed a B2B platform. At the time, it was called ePASS.
What we learned pretty quickly was, although we have this B2B platform, a platform is nothing, if it doesn’t have buyers and suppliers. You can have technology, but if you can’t get people on it to order things, and if there’s nobody on it to order things, nobody is going to come on, to sell things. We said “Oh, what we need to do is we need to take this B2B network, and we need to plug it into where the loan officers live.” And loan officers lived in these solutions called LOS’s, or points of sale. These desktop solutions where they took the application. Lo and behold, we started connecting those things together, and we started seeing transactions across the platform. And the magic started.
Dobson: The magic?
Corr: We [decided we] should build our own loan origination platform, initially focused on brokers. We came up with this concept, over a year time-frame, just spending time in the field coming up with a better origination solution for brokers, called Encompass.
Encompass was vastly different, and we took a different tack. The tack we took was people were selling this software at a very low price. You’d sit there and see that there’s no way that you can invest, and kind of bet on getting your money back by selling it. So, we said ,“If we can have a better doorway to the industry, we can actually monetize all of the transactions off of the back end, especially around the broker space.” What we actually did, originally, was we went out and we gave out tens of thousands of CDs. CDs! They don’t exist anymore. This was back in 2003.
Dobson: Is that when business took off?
Corr: Mind you, this is all on-premise software. This is not software-as-a-service, yet. This is kind of the old way of doing things. We’re on this incredible run, right? We’re picking up things, we’re growing rapidly. I think at the time, we were probably about $38 million in revenue. People were starting to think about “This is a fast-growing company. Maybe we’ll come in and buy it, swoop in,” and so forth.
Dobson: But then the recession happened.
Corr: All of a sudden, 2007, which was the peak before the implosion. We were there. We saw it, because we had this transaction platform, and we were facilitating all of these transactions from all of these brokers, to all of these wholesale lenders; New Century and IndyMac and Countrywide. We saw the dynamic happening.
We saw it before it really tipped over. We said “This is going to get ugly.” We said “We’ve always run this company profitably, so we’re going to adjust, because we know it’s going to be, as some people might say, a nuclear winter.” We saw it coming.
What we did was we cut a third of our employees. We figured out how to continue to flex, and move with the winds. We further accelerated our investments into compliance and regulatory technology and other things for bank
Then, we came out in 2009, and our bet started paying off, because everybody was looking, and they needed a system to deal with all of the new rules coming out of Dodd-Frank, the CFPB, RESPA changes. We were in a great position to go ahead and take advantage of that.
We also saw, and we had always planned for it, that software-as-a-service was now going to be relevant to the industry. Now, we’re a lender product, focused on compliance and regulatory, software-as-a-service. We came up with a unique pricing model called success-based pricing, which allowed us to sell a subscription, as well as a variable, but really tie into the way these lenders actually operate, which is funding loans on a regular basis.
Dobson: Can you share some of the numbers behind your growth?
Corr: We took the company public in 2011, converted all of our customers over to software-as-a-service, that were on our on-prem. We accelerated through that. Basically, we’ve been on a curve since 2011, until 2018, where we’ve gone from about $60 million in revenue to roughly around $500 million in revenue this year [2018]. We’ve gone from about 200 employees at that time, to a little bit under 1,600 employees. We’ve gone from a market cap of $150 million, when we went initially public, to over $3.5 billion, backed down a little bit right now, because of the industry headwinds in this cycle. But it’s been this incredible trajectory.
We’ll do roughly 2.6 million loans, 20-plus million transactions, with all of these different thousands of partners, thousands of lenders that cover the gamut from big national banks, big mortgage banks, regional banks, community banks, credit unions, little guys, big guys, about 2,500 different lenders. It’s become this massive ecosystem.
Dobson: How do you plan to keep increasing revenue?
Corr: We’ve got about 40% of the loans in the U.S. going across the platform. We keep picking up share, and I’ve kind of laid out that I think we’ve been picking up about 5% share a year, for the last three or four years.
The other [way] is revenue per loan. That’s because as we pick up share, and we have more and more loan volume, and it’s highly sticky, and no matter what the share in the industry is, you have those folks doing that business. The cost to do a loan for a lender is the highest it’s ever been, in the history of the industry. It’s like $9,000, in Q1.
So, when you look at that, and you say “Well, back in 2008, it was $3,500.” In 2008, it was inefficient. You should be able to take something from $9,000 down to probably a couple of thousand, and should be able to take out a fair amount of time.
Then, on the other side of things, we could even make the production side of things, where the loan officer engages with a consumer, that much more efficient. We can do things around enabling the consumer to do things more early on, on a self-serve basis, which is what consumers want. We can make loan officers more efficient, because they’re a big cost, as well. Their commissions are very high.
Dobson: What’s your next phase of growth?
Corr: Right now, we average about $185 of revenue per loan that goes across our platform, between the software and the connectivity and the transactions, etc. But again, we’ve been growing that at about $20 a year, by basically improving; adding more value for the lenders, doing more things with the partners on the ecosystem, and creating more efficiency.
As I look over the next five years, I think there is even way more ahead of us, than what we’ve actually seen over the last, let’s say seven or eight, or 20 years.
The one thing that we have not broken into yet, and I think we will eventually, is say the top five banks in the U.S. The top five banks in the U.S. do maybe about 14% of industry volume, on a retail basis. Again, I say I use the term “retail,” because although loans are sold and passed around, it all has to start from an origination standpoint. So, that’s kind of where the loan starts. Even though many of these institutions buy loans, that’s kind of a second transaction, if you will.