What happened

After reporting mixed third-quarter results, shares of Ellie Mae (NYSE:ELLI), a software-as-a-service business focused on the mortgage industry, fell 19% as of 11:01 a.m. EDT on Friday.

So what

Here's a look at the key highlights from the quarter:

  • Revenue increased 15% to $123 million. For context, Wall Street was expecting $128.2 million in revenue, so this was a significant miss.
  • GAAP net income fell 14% to $12.4 million, or $0.35 per share. 
  • Non-GAAP net income rose 22% to $24.2 million, or $0.67 per share. That figure exceeded the $0.54 in EPS that market watchers had forecasted.
Man in front of laptop looking upset.

Image source: Getty Images.

CEO Jonathan Corr was proud of his company's ability to grow in spite of a challenging mortgage environment, but he admitted that the macro situation will likely make the company miss its financial targets for the year:

Rising rates, low housing inventory, and overall home affordability are serving as significant headwinds to the overall mortgage market. While we believe these headwinds are temporary, they are prompting us to reset our assumptions for the year. 

Here's what the company expects to happen in the third quarter:

  • Revenue is expected to land between $113 million and $116 million. That's a far cry from the $127.7 million in revenue that analysts had projected.
  • Non-GAAP net income is expected to land between $12.4 million and $14.2 million, or $0.34 to $0.39 per share. That's also below the $0.46 in EPS that Wall Street was expecting.

Management took a hatchet to its full-year guidance, too:

  • Revenue is now expected to land between $477 million and $480. That's below its prior call for revenue of $495 million to $505 million.
  • Non-GAAP net income is expected to be in the range of $65.8 million to $67.6 million, or $1.84 to $1.88 per share. That's an adjustment from its prior outlook of $1.79 to $1.92. 

Given the disappointing revenue and lowered guidance, it isn't surprising to see this richly valued stock being taken to the woodshed today.

Now what

The nature of Ellie Mae's business ensures that its short-term results will always be dependent on a robust mortgage market. That's a factor that is permanently outside of management's control, which is a fact that investors simply have to come to terms with.

A look beyond the headline numbers clearly indicates that Ellie Mae is having success at grabbing market share. Loans closed on Ellie Mae's platform rose 1% year over year, which is an impressive result when considering that industrywide volumes declined 13% during the same period.

Ellie Mae's long-term financial results hinge on its ability to sign up new users and take market share. On that front, the company continues to do just fine, so I see no reason for bulls to panic today.

Brian Feroldi owns shares of Ellie Mae. The Motley Fool owns shares of and recommends Ellie Mae. The Motley Fool has a disclosure policy.