The recent refinance boom sent record profits flowing to the mortgage technology developer, which charges for its products and services by the number of loans that lenders close. But as origination volume declined in the latter half of 2013, Ellie Mae now finds itself in the ebb of its "Success-Based Pricing" model.

The vendor is trying to maintain its financial performance by signing customers and converting old ones from legacy technology to the software-as-a-service-based version of its Encompass loan origination system. The headwinds it faces in these efforts reflect broader industrywide challenges: lower origination volume and new compliance requirements.

For example, getting compliant has taken precedence over upgrading core systems at many lenders.

"The number of active users on our self-hosted platform decreased and the pace of SaaS user implementation slowed as lenders focused on preparing for the new [Qualified Mortgage and Ability-to-Repay] regulations," Chief Financial Officer Ed Luce said during a Feb. 13 investor conference call. Ellie Mae reported net income of $1.6 million off revenue of $30.4 million for the fourth quarter of 2013.

Ellie Mae ended the year with 92,000 active Encompass users, up 25% from the end of 2012, but down nearly 1,600 seats from the third quarter of 2013. The Pleasanton, Calif. vendor booked a company-record 9,800 SaaS LOS sales in the fourth quarter, including 6,500 new users and 3,300 conversions and upgrades of existing client licenses. But converting those sales into active users has been stymied by longer implementation timelines required by new, larger lenders.

"Because they are bigger organizations, they're more complex, and there is more going on in terms of laying down their workflows and working through them with training and change management," Chief Operating Officer Jonathan Corr told investors.

Still, company executives say they're steadily working through the backlog of clients waiting to use its technology.

"As 2014 begins and the shock of new regulations settles in, we have seen already an uptick in overall active users in January," Luce said.

In addition, Ellie Mae signed two new investor participants to its Total Quality Loan program. This technology and services package provides tamper-proof versions of borrower verification data on loans sold by correspondent lenders, so investors don't have to order duplicate third-party borrower verifications and loan reviews. Stonegate Mortgage and PHH Mortgage joined Ocwen's Homeward Capital, CitiMortgage, and pilot participant Wells Fargo in using TQL.

Hosted technology sold with a transaction-based pricing model offers lenders lower upfront costs in exchange for recurring monthly fees. Those ongoing fees are determined in part by a base rate for the number of users on the platform and also by the volume of loans a lender closes. Vendors also benefit from the model because it provides a stream of recurring revenue that makes it easier to forecast profit.

A key financial metric that Ellie Mae investors look at is average revenue per user, which incorporates revenue earned from the LOS, as well as ancillary services integrated with the core system. Lenders buy technology to handle tasks like document preparation and compliance reviews that are provided both directly by Ellie Mae, as well as through third-party vendors that pay transaction fees to connect to the LOS to reach Ellie's lenders.

Ellie's average revenue per user declined 21% year-over-year to $327. For SaaS-based technology users (which account for nearly 70% of all users), average revenue was $292, down 24% year-over-year. This drop was "due to a decrease in the number of closed loans per active SaaS user as well as lower network transactions due to reduced overall loan volumes," Luce said.

When originations are down — like the roughly 43% year-over-year decline in industrywide volume during the fourth quarter — lenders order fewer credit reports, doc packages and other verification services. And Ellie's average revenue per user is further diluted by the new users it's added since 2012.

With the mortgage industry expecting annual origination volume to fall 31%, Ellie Mae projected full-year revenue of $150 million to $153.5 million and net income of $11.8 million to $12.5 million, representing a 17% to 19% increase in revenue, but 1% to 6% decrease in net income.

But even those targets may be hard to reach, warns William Blair analyst Brandon Dobell. To hit its revenue guidance, quarterly growth of Ellie's average revenue per user rate must increase faster than it has in all but one quarter in the past two years, he wrote in a Feb. 14 research note.

"Variable revenue per user growth will need to diverge from its fairly tight correlation to mortgage volume growth, particularly in the second half of the year, to not be a drag on revenue growth relative to the guidance range," Dobell said.

In other words, to hit its goals Ellie Mae will need to be less sensitive to its clients' pain.