Here's Why Ellie Mae Is Dropping Today

By Brian Feroldi Markets Fool.com

What happened

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In response to the company's first-quarter earnings, shares of Ellie Mae(NYSE: ELLI),a leading provider of software for the mortgage industry, fell by double digits inearly-morning trading on Friday.

So what

Here's a review of the key highlights from the first quarter:

  • Revenue grew 26% to $93.0 million, which matched theconsensus forecast among those following the stock.
  • GAAP net income nearly quadrupled to $9.6 million, or $0.27 per share.
  • On a non-GAAP basis, net income increased 17% to $8.9 million. However, a secondary common stock offering completed in August of last year resulted in 3.2 million more shares outstanding. As a result, non-GAAP EPS only increased by a penny to $0.25. That was still $0.04 ahead of Wall Street's expectation.
  • 12,100 Encompass seats were booked during the quarter.

CEO Jonathan Corr stated that Ellie Mae "had a very productive first quarter" and that the company was "on track for a solid year." He was also quick to note that these results were produced during a period where industrywide mortgage volume declined by 34% from last quarter.

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Image source: Getty Images.

Turning to guidance, Ellie Mae offered up the following projections for the second quarter of 2017:

  • Revenue range of $109.0 million to $111.0 million
  • GAAP net income range of $15.7 million to $16.4 million, or $0.43 to $0.45 per diluted share
  • Non-GAAP net income is expected to land between $18.2 million to $19.2 million, or $0.50 to $0.53 per share

For comparison purposes, Wall Street was hoping for $109.9 million in revenue and $0.53 in non-GAAP EPS for the upcoming quarter, so the company's profit estimate came in a bit below expectations.

As for full-year 2017, management told investors to expect the following:

  • Revenue between $433.0 million to $440.0 million
  • Net income in a range of $50.0 million to $55.0 million, or $1.37 to $1.49 per share
  • Non-GAAP net income between $65.6 million to $70.7 million, or $1.79 to $1.92 per share

These numbers are also close to the $438.8 million in revenue and $1.88 in non-GAAP EPS that those following the stock expected to see.

Despite posting strong growth and estimate-topping results, Wall Street appears to be focused on the soft profit forecast for next quarter, hence the shares are falling today.

Now what

Ellie Mae's stock has been on a terrific run over the past few months, which has pushed its valuation into the stratosphere. Given the high expectations, perhaps it isn't surprising to see that shares are taking a step back even though the company's results were excellent in absolute terms.

While rising interest rates could become a significant headwind to mortgage activity, Ellie Mae continues to prove that its services remain in demand even during industry downturns. As long as Ellie Mae can continue to attract and retain Encompass users, then its financial results should continue to flourish.

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