Breaking Down the New ‘Ellie Mar DataTrac’
On Monday, loan origination system provider Ellie Mae flexed some of its newfound strength as a public company by acquiring rival LOS vendor Del Mar DataTrac for $25.2 million—$17.2 million cash up front, followed by cash payments of $3 million in both 2012 and 2013 and the final $2 million being paid in 2014.
It’s a textbook move for Pleasanton, Calif.-based Ellie Mae, which got a boost in its formative years by acquiring and combining LOS vendors Contour and Genesis in 2001. And while Ellie Mae and San Diego-based DMD both have expanded their product offerings over time to include full end-to-end LOS technology, the two companies arrived at that destination from opposite paths; Ellie Mae specializing in front end, point-of-sale technology, while DMD got its start with a back office LOS.
“It’s very strong as a back office solution,” Jonathan Corr, Ellie Mae’s chief strategy officer, said about DMD. “The fulfillment side of things, very good capabilities around back office, around secondary, around reporting.
“Ellie Mae and Encompass, obviously, it started off very strong on the production side,” he continued. “We’ve obviously built ourselves out on the back office side, but we don’t have as much experience as they do.”
And while Ellie really won’t be changing its name to “Ellie Mar DataTrac,” future products will rely on the core strengths of each company. “Collectively, as we go into next year, we’ll be working on a combined offering that’s the best of both combinations and driving towards delivering that in the future,” Corr said.
The deal has wide-ranging implications for multiple constituencies. Here’s a look at what it means for some of them:
DMD has approximately 200 lender customers using its DataTrac LOS. For the time being, most will be relatively unaffected by the change, as Ellie Mae intends to keep both product lines.
“It didn’t necessarily surprise me,” said Michael Moorhouse, Western regional manager at Summit Mortgage Corp., a privately held nonbank mortgage lender based in Minnesota. Summit uses DataTrac as its back office LOS in its 51 branches located across 22 states. Moorhouse has been a DMD customer since 1993, implementing the system at three different mortgage companies.
Going forward, Corr said Ellie Mae’s strategy is to provide integrations and connectivity between both companies’ software. For DMD customers, that means access to the Ellie Mae Network for automated ordering of vendor services, while Encompass users will get access to DMD offerings like DataTrac Commissions, an automated loan officer commission platform.
But perhaps the most crucial new integration will be the one between the Encompass POS and DataTrac LOS, a combination that analysts at Barclays Capital estimate is in use by approximately 10% of DMD customers. Over time, that integration will supplant DMD’s DataTrac Originator, the POS platform it launched earlier this year.
Summit was an early adopter of DTO, electing to switch from Encompass to the DMD POS. Moorhouse said the company needed a tighter integration between its two systems and will continue on its path of using the DTO platform.
Corr said Ellie Mae will look to sell Encompass to DataTrac customers in lieu of DTO and other competing POS technology by creating a better integration between the two. That’s a function Moorhouse said would be a requirement for Summit to go back to Encompass—though he added he’s intrigued by any future offering that combines the core functions of Encompass and DataTrac into one end-to-end system.
“Somewhere down the road you’re going to see a product that’s the best of both and is able to leverage both technologies fairly well,” Moorhouse said. “I feel comfortable with that, but I would probably be wary if it wasn’t these two companies getting together.”
Ellie Mae Shareholders
Ellie Mae estimates its customers will originate one million loans in 2011. The DMD customer base will originate an additional 500,000 mortgages, a significant increase in volume in a year marked by an industrywide decline in originations. In addition, the DMD customer base brings 20,000 potential individual users to the existing 50,600 users already on the Ellie Mae Network, generating transaction revenue for Ellie Mae’s underwriting vendor integration business.
To reflect the increased customer base, Ellie Mae revised its annual revenue projection to $51 million to $53 million, up from $50 million to $52 million. But Ellie also lowered its net income projection to between $1.2 million to $2.2 million, to account for the added integration expenses.
BarCap estimates DMD’s 2010 revenue was $7.7 million, but with expenses of $8 million, the company netted an operating loss of under $500,000.
“The total cash outlay of $25.2 million represents an EV/2010 sales multiple of 3.1x, which is roughly inline with average take out for software acquisitions of 3.6x,” BarCap said in a research note Tuesday, adding the acquisition represents 67% of Ellie Mae’s cash balance of roughly $38 million.
Ellie Mae will add almost all of DMD’s staff, or about 50 new employees. Former DMD president Rob Katz will now report to Jonathan Corr as executive vice president of product strategy and DMD chairman Jeb Spencer will join Ellie Mae’s board of directors.
This isn’t the first time DMD has been acquired, but the strategy is very different than when Fiserv acquired the company in 2005—and later sold it back to its previous owner three years later.
“We have a really good understanding of the culture, the common customer base and we believe they meld very well together,” Corr said. “Fiserv was a much bigger company that really wasn’t familiar with this target space.”
Another differentiator is that Fiserv ran DMD as a standalone company, while Ellie Mae intends to integrate the two. “There’s no intention of keeping this separately, it’s going to become part-and-parcel,” Corr added.
Mortgage Technology Industry
The strategy of using independent POS and LOS technologies is becoming increasingly archaic as more vendors provide complete end-to-end systems.
“In today’s environment, having a system that’s not tightly integrated can be a liability for mortgage lenders,” Moorhouse said. “You really have to be on top of your data and know exactly what’s going on both at the branches on point of sale and on the backend.”
According to BarCap’s estimates, 70% of DMD’s customers use Calyx Software’s Point for their POS platform, with the remaining lenders not using Point or Encompass predominately using Byte Software’s BytePro POS.
Corr said Ellie Mae was targeting DMD customers and the acquisition was a faster route to the company’s goal.
“We could continue to compete—and we were taking customers over time—but it would take us, at the pace we’re going with this customer base, four or five years,” Corr said. “We’d rather pick them up in fell swoop, make them apart of our team and add great talent and work together to basically continue to grow aggressively and be the ultimate and premier solution for mortgage lenders.”
Now that Ellie Mae has acquired the DataTrac customers, Jeff Lebowitz, president of mortgage technology research and consultancy MORTECH believes Ellie Mae will now focus its efforts on targeting POS customers.
“Ultimately Ellie Mae will try and coax Calyx users to convert to Encompass or a variation of Encompass,” Lebowitz said.
“Ellie Mae will reinforce the industry's need to consolidate tech suppliers into fewer entities. We at MORTECH have tried to persuade vendors of the wisdom of supplementing organic growth with growth to acquisition,” he continued. “This deal may be an awakening for vendors to join forces to compete in a restructured marketplace.”