Three Months Ended Nine Months Ended --------------------------- --------------------------- % % (000's) 9/27/2008 9/29/2007 Change 9/27/2008 9/29/2007 Change --------- --------- ------- --------- --------- ------- Revenue: Managed Services $ 10,516 $ 9,839 7% $ 30,720 $ 28,334 8% Consulting Services 7,682 12,622 -39% 27,049 39,605 -32% --------- --------- ------- --------- --------- ------- Services Revenue 18,198 22,461 -19% 57,769 67,939 -15% Product 956 2,909 -67% 5,851 8,672 -33% --------- --------- ------- --------- --------- ------- Net Revenue 19,154 25,370 -25% 63,620 76,611 -17% Reimbursed expenses 941 1,243 2,487 3,894 --------- --------- ------- --------- --------- ------- Total Revenue $ 20,095 $ 26,613 -24% $ 66,107 $ 80,505 -18% --------- --------- ------- --------- --------- -------Q3 2008 Highlights Third Quarter 2008 highlights include:
-- Increased Managed Services revenues by 11% sequentially, principally driven by the 64% sequential increase in Behavioral Analytics™ subscription revenues -- Closed two new large ICS contracts totaling approximately $14 million -- Signed two new Behavioral Analytics™ Deployment contracts and one new Assessment contract with premier customers (a new division of a Top 5 HMO, a new Top 5 HMO and a large life insurance company) -- Raised $15 million in a fully subscribed Rights Offering -- Ended the Third Quarter with $33.5 million in Cash -- Reduced our cost structure approximately $3 million on an annual basisThird quarter results were adversely impacted by the sourcing delays and related revenue recognition issues associated with a large ICS order. This event reduced Third Quarter Services revenues by $0.2 million and Third Quarter Product revenues by $3.6 million. These amounts are expected to be realized in the Fourth Quarter. eLoyalty closed the Third Quarter with a Managed Services backlog of $69.9 million(2) (an increase from $69.5 million as compared to the end of the Second Quarter). In addition, early in the Fourth Quarter, the Company closed a significant new CRM Consulting project at one of its Behavioral Analytics™ HMO clients. The revenues from this project will help offset the continuing declines in revenues from several of eLoyalty's traditional Consulting clients, as well as improve the Company's revenue visibility for the Fourth Quarter. Fourth Quarter 2008 Guidance eLoyalty provides guidance for Services revenue only. Product revenue from the sale of third-party software and hardware can fluctuate substantially between periods and is not a primary focus of the Company's business. The major factors driving eLoyalty's Fourth Quarter 2008 outlook include:
-- Strong revenue visibility for the current quarter -- Increased ICS Consulting revenues -- Increased ICS Managed Services revenues -- Increased Behavioral Analytics™ revenuesBased on these factors, eLoyalty currently expects its Fourth Quarter 2008 Services revenues will increase 7% sequentially to approximately $19.5 million. In the Fourth Quarter, eLoyalty expects to achieve record Managed Services revenues and record revenues from its two principal Service Lines (ICS and Behavioral Analytics™). The growth in these areas will continue to improve its revenue mix in the Fourth Quarter of 2008, as evidenced by the following:
-- Approximately 56% of Services revenues is expected to come from Managed Services, up from 51% in the fourth quarter of 2007 -- Approximately 76% of Services revenues is expected to come from Behavioral Analytics™ and ICS Service Lines, up from 57% in the fourth quarter of 2007In addition, eLoyalty expects to be EBITDA (Adjusted Earnings(1)) profitable in the Fourth Quarter. Conference Call Information eLoyalty management will host a conference call at 5:00 p.m. ET on Wednesday, November 5, 2008. A webcast of the conference call and slide presentation will be available live via the Internet at the Investor Relations section of eLoyalty's web site at http://www.eloyalty.com/investor/ where this press release, as well as other financial information that will be discussed on that call, is also available. For those who cannot access the live broadcast, or the continued availability on eLoyalty's website, a replay of the conference call will also be available beginning approximately two hours after the live call is completed until November 19, 2008 by dialing (800) 642-1687 or, for international callers, (706) 645-9291 and entering conference ID number 68887529. About eLoyalty eLoyalty helps its customers achieve breakthrough results with revolutionary analytics and advanced technologies that drive continuous business improvement. With a long track record of delivering proven solutions for many of the Fortune 1000, eLoyalty's offerings include the Behavioral Analytics™ Service, Integrated Contact Solutions and Consulting Services, each of which enables focused business transformation. Safe Harbor Statement This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding anticipated financial results and other matters that are not strictly historical in nature. These forward-looking statements are based on current management expectations, forecasts and assumptions, and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that might cause such a difference include those described under "Forward-Looking Statements" and "Risk Factors" in eLoyalty's Form 10-K, Form 10-Q and other filings with the U.S. Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements. They reflect opinions, assumptions and estimates only as of the date they are made, and eLoyalty Corporation undertakes no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or circumstances or otherwise. (1) eLoyalty presents Adjusted Earnings, a non-GAAP measure that represents cash earnings performance, excluding the impact of non-cash expenses and expense reduction activities, because management believes that Adjusted Earnings provide investors with a better understanding of the results of eLoyalty's operations. Management believes that Adjusted Earnings reflect eLoyalty's resources available to invest in its business and strengthen its balance sheet. In addition, expense reduction activities can vary significantly between periods on the basis of factors that management does not believe reflect current-period operating performance. Although similar adjustments for expense reduction activities may be recorded in future periods, the size and frequency of these adjustments cannot be predicted. The Adjusted Earnings measure should be considered in addition to, not as a substitute for or superior to, operating income, cash flows or other measures of financial performance prepared in accordance with GAAP. (2) The terms of each Managed Services contract range from one to five years. eLoyalty uses the term "backlog" with respect to its Managed Services engagements to refer to the expected revenue to be received under the applicable contract, based on its currently contracted terms and, when applicable, currently anticipated levels of usage and performance. Actual usage and performance might be greater or less than anticipated. In general, eLoyalty's Managed services contracts may be terminated by the customer without cause, but early termination by a customer usually requires a substantial early termination payment.
eLoyalty Corporation CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited and in thousands, except per share data) For the For the Three Months Ended Nine Months Ended -------------------- -------------------- Sept. 27, Sept. 29, Sept. 27, Sept. 29, 2008 2007 2008 2007 --------- --------- --------- --------- Revenue: Services $ 18,198 $ 22,461 $ 57,769 $ 67,939 Product 956 2,909 5,851 8,672 --------- --------- --------- --------- Revenue before reimbursed expenses (net revenue) 19,154 25,370 63,620 76,611 Reimbursed expenses 941 1,243 2,487 3,894 --------- --------- --------- --------- Total revenue 20,095 26,613 66,107 80,505 Operating expenses: Cost of services 11,673 14,945 38,598 44,906 Cost of product 1,041 2,169 4,865 6,601 --------- --------- --------- --------- Cost of revenue before reimbursed expenses 12,714 17,114 43,463 51,507 Reimbursed expenses 941 1,243 2,487 3,894 --------- --------- --------- --------- Total cost of revenue, exclusive of depreciation and amortization shown below: 13,655 18,357 45,950 55,401 Selling, general and administrative 10,608 11,959 33,285 36,486 Severance and related costs 686 5 1,138 5 Depreciation and amortization 1,094 913 3,149 2,634 --------- --------- --------- --------- Total operating expenses 26,043 31,234 83,522 94,526 --------- --------- --------- --------- Operating loss (5,948) (4,621) (17,415) (14,021) Interest and other (expense) income, net (95) 281 (13) 1,199 --------- --------- --------- --------- Loss before income taxes (6,043) (4,340) (17,428) (12,822) Income tax provision (27) (6) (76) (8) --------- --------- --------- --------- Net loss (6,070) (4,346) (17,504) (12,830) Dividends related to Series B preferred stock (324) (341) (973) (1,070) --------- --------- --------- --------- Net loss available to common stockholders $ (6,394) $ (4,687) $ (18,477) $ (13,900) ========= ========= ========= ========= Basic net loss per common share $ (0.63) $ (0.55) $ (1.93) $ (1.68) ========= ========= ========= ========= Diluted net loss per common share $ (0.63) $ (0.55) $ (1.93) $ (1.68) ========= ========= ========= ========= Shares used to calculate basic net loss per share 10,171 8,578 9,562 8,272 ========= ========= ========= ========= Shares used to calculate diluted net loss per share 10,171 8,578 9,562 8,272 ========= ========= ========= ========= Stock-based compensation, primarily restricted stock, included in individual line items above: Cost of services $ 682 $ 187 $ 2,682 $ 743 Selling, general and administrative 2,376 2,066 9,144 7,572 Severance and related costs 58 103 eLoyalty Corporation CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited and in thousands, except share and per share data) September 27, December 29, 2008 2007 ------------- ------------ ASSETS: Current Assets: Cash and cash equivalents $ 29,851 $ 21,412 Restricted cash 3,655 2,455 Receivables, (net of allowances of $76 and $110) 9,190 11,322 Prepaid expenses 9,316 8,465 Other current assets 3,698 1,074 ------------- ------------ Total current assets 55,710 44,728 Equipment and leasehold improvements, net 6,883 7,391 Goodwill 2,643 2,643 Intangibles, net 688 828 Other long-term assets 4,509 4,461 ------------- ------------ Total assets $ 70,433 $ 60,051 ============= ============ LIABILITIES AND STOCKHOLDERS EQUITY: Current Liabilities: Accounts payable $ 5,386 $ 2,997 Accrued compensation and related costs 4,454 5,555 Unearned revenue 16,489 11,772 Other current liabilities 4,288 3,783 ------------- ------------ Total current liabilities 30,617 24,107 Long-term unearned revenue 4,772 7,416 Other long-term liabilities 2,330 1,625 ------------- ------------ Total liabilities 37,719 33,148 ------------- ------------ Redeemable Series B convertible preferred stock, $0.01 par value; 5,000,000 shares authorized and designated; 3,631,303 and 3,745,070 shares issued and outstanding with a liquidation preference of $18,844 and $19,768 at September 27, 2008 and December 29, 2007, respectively 18,520 19,100 Stockholders Equity: Preferred stock, $0.01 par value; 35,000,000 shares authorized; none issued and outstanding Common stock, $0.01 par value; 50,000,000 shares authorized; 13,632,116 and 9,885,458 shares issued at September 27, 2008 and December 29, 2007; and 13,350,235 and 9,735,492 outstanding at September 27, 2008 and December 29, 2007, respectively 136 99 Additional paid-in capital 195,790 172,483 Accumulated deficit (176,052) (158,548) Treasury stock, at cost, 281,881 and 149,966 shares at September 27, 2008 and December 29, 2007 (1,839) (2,731) Accumulated other comprehensive loss (3,841) (3,500) ------------- ------------ Total stockholders equity 14,194 7,803 ------------- ------------ Total liabilities and stockholders equity $ 70,433 $ 60,051 ============= ============ eLoyalty Corporation CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited and in thousands) For the Nine Months Ended --------------------- Sept. 27, Sept. 29, 2008 2007 --------- --------- Cash Flows from Operating Activities: Net loss $ (17,504) $ (12,830) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 3,149 2,634 Stock-based compensation 11,826 8,315 Provision for uncollectible amounts (16) 152 Severance and related costs 229 - Changes in assets and liabilities: Receivables 2,110 (473) Prepaid expenses (325) (2,802) Other assets (2,836) 922 Accounts payable 2,391 527 Accrued compensation and related costs (903) 1,078 Unearned revenue 2,081 5,051 Other liabilities 2 (1,117) --------- --------- Net cash provided by operating activities 204 1,457 --------- --------- Cash Flows from Investing Activities: Capital expenditures and other (641) (3,384) --------- --------- Net cash used in investing activities (641) (3,384) --------- --------- Cash Flows from Financing Activities: Rights offering, net 14,898 - Acquisition of treasury stock (3,123) (3,069) Increase in restricted cash (1,200) (1,000) Payment of Series B dividends (1,317) (1,465) Proceeds from stock compensation and employee stock purchase plans 287 379 Principal payments under capital lease obligations (538) - Other - 24 --------- --------- Net cash provided by (used in) financing activities 9,007 (5,131) --------- --------- Effect of exchange rate changes on cash and cash equivalents (131) (91) --------- --------- Increase (decrease) in cash and cash equivalents 8,439 (7,149) Cash and cash equivalents, beginning of period 21,412 31,645 --------- --------- Cash and cash equivalents, end of period $ 29,851 $ 24,496 ========= ========= Non-Cash Investing and Financing Transactions: Capital lease obligations incurred $ 1,986 $ 528 Capital equipment purchased on credit 1,986 528 Change in net unrealized security gain (211) 387 Supplemental Disclosures of Cash Flow Information: Cash refunded for income taxes, net $ - $ 1,155 Interest paid (367) - eLoyalty Corporation CALCULATION OF ADJUSTED EARNINGS MEASURE (Unaudited and in thousands) For the For the Three Months Ended Nine Months Ended -------------------- -------------------- Sept. 27, Sept. 29, Sept. 27, Sept. 29, 2008 2007 2008 2007 --------- --------- --------- --------- GAAP - Operating loss $ (5,948) $ (4,621) $ (17,415) $ (14,021) Add back (reduce) the effect of: Stock-based compensation 3,058 2,253 11,826 8,315 Severance and related costs 686 5 1,138 5 Depreciation and amortization 1,094 913 3,149 2,634 --------- --------- --------- --------- Adjusted earnings measure - income (loss) $ (1,110) $ (1,450) $ (1,302) $ (3,067) ========= ========= ========= =========
Contact Information: PRESS RELEASE Contact: eLoyalty Corporation Chris Min Vice President and Chief Financial Officer (847) 582-7222