Three Months Ended Nine Months Ended
-------------------------------------------
(000's) 9/29/2007 9/30/2006 9/29/2007 9/30/2006
---------- ---------- ---------- ----------
Revenue:
Consulting services $ 12,622 $ 11,137 $ 39,605 $ 32,517
Managed services 9,839 8,348 28,334 19,470
---------- ---------- ---------- ----------
Services revenue 22,461 19,485 67,939 51,987
Product 2,909 5,165 8,672 11,002
---------- ---------- ---------- ----------
Net revenue 25,370 24,650 76,611 62,989
Reimbursed expenses 1,243 1,266 3,894 3,104
---------- ---------- ---------- ----------
Total revenue $ 26,613 $ 25,916 $ 80,505 $ 66,093
========== ========== ========== ==========
Third Quarter Overview
Our third quarter revenue was approximately $1.0 million below our internal
target. The primary reason for this shortfall was lower than expected
revenue in our traditional CRM and Integrated Contact Solutions (previously
referred to as CIPCC) Service Lines as a result of lower revenue at several
large accounts and later than anticipated start dates at several new
Integrated Contact Solutions customers.
In spite of the lower than expected Consulting services revenue in the
third quarter, we continue to make progress transforming our business
model. Highlights for the third quarter of 2007 include:
-- Record $3.4 million of Behavioral Analytics™ revenue
-- Record $9.8 million of Managed Services revenue
-- Record 60% of our Services Revenue came from Behavioral Analytics™
and Integrated Contact Solutions
Company Strategy and Expense Management
The basic premises of eLoyalty's strategy are as follows:
-- Build strong position in two compelling niches: Behavioral
Analytics™ and Integrated Contact Solutions; and
-- Deploy a unique delivery model that combines managed services and
consulting to produce significant benefits for our clients
These strategies have driven significant growth since the beginning of
2006. Comparing the third quarter of 2007 to the first quarter of 2006:
-- Behavioral Analytics™ and Integrated Contact Solutions quarterly
revenue has increased 128%, from $5.9 million to $13.5 million
-- The percentage of our Services revenue coming from these new service
lines has grown from 35% to 60%
-- Managed services quarterly revenue has increased 89%, from $5.2
million to $9.8 million
-- The percentage of our Services revenue coming from Managed services
has grown from 31% to 44%
Growing the Integrated Contact Solutions and Behavioral Analytics™
Service Lines continues to require significant investment. In particular,
we invested in excess of $2 million in Behavioral Analytics™ in the
third quarter of 2007. We believe it is appropriate to maintain, and
possibly, increase, this level of investment based on our current pipeline
of Behavioral Analytics™ and the large market opportunity it represents.
Based on these results, strong client references and the positive outlook
for these market niches, we remain confident in our basic strategies. At
the same time, we believe it is appropriate to more tightly manage our
expenses as these market opportunities gradually emerge. Towards that end,
we have taken a number of expense management actions that will reduce our
cash expense run rate by approximately $1.0 million in the fourth quarter.
Expense Classification Changes
In the first quarter of 2007, eLoyalty began to classify certain expenses
that had been previously reported within Cost of Services as Selling,
General, and Administrative expense. We believe this revised
classification will provide a clearer understanding of the key profit/loss
drivers and investments in our business. These changes are the result of
the ongoing evolution of our business model from Consulting to Managed
services and the investments we are making to build market share and
competitive advantage with our Behavioral Analytics™ service line. The
changes, which will be reflected prospectively in our Income Statement, are
as follows:
-- Costs associated with Behavioral Analytics™ solution development
and certain other Managed services administrative and support costs
-- Non-billable costs associated with our vertical industry teams, made
up of industry experts, account partners, and project managers
-- Costs associated with overall delivery management and administrative
support personnel
The impact of these changes in the third quarter of 2007 decreased Cost of
Services and, correspondingly, increased Selling, General, and
Administrative expense by $4.7 million.
The impact of these changes in the second quarter of 2007 decreased Cost of
Services and, correspondingly, increased Selling, General, and
Administrative expense by $4.8 million.
Current Business Outlook
eLoyalty provides guidance for Services revenue only, as 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.
Fourth quarter revenue will be adversely impacted by the seasonal slowdown
in Consulting services and by elongated sales cycles at eLoyalty's
Financial Services clients and prospects. The Company's guidance for the
fourth quarter of 2007 is to achieve Services revenue of $22.5 million.
The Company's objective is to achieve this target, and not to exceed or
fall below the target by more than 5%.
Conference Call Information
eLoyalty management will host a conference call at 5:00 p.m. ET on
Wednesday, November 7, 2007. 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
call is completed until November 21, 2007, by dialing (800) 642-1687 or,
for international callers, (706) 645-9291. To access the replay,
participants will be required to enter the Conference ID of 19635018.
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
Behavioral Analytics™, Integrated Contact Solutions and Consulting
Services, aligned to enable focused business transformation.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Act of 1995: Statements
in this news release that are forward-looking statements are subject to
various risks and uncertainties concerning specific factors described in
eLoyalty's Form 10-K and other filings with the U.S. Securities and
Exchange Commission. Such information contained herein represents
management's best judgment as of the date hereof based on information
currently available. eLoyalty does not intend to update this information
and disclaims any legal obligation to the contrary. Historical information
is not necessarily indicative of future performance.
(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.
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. 29, Sept. 30, Sept. 29, Sept. 30,
2007 2006 2007 2006
-------- -------- -------- --------
Revenue:
Services $ 22,461 $ 19,485 $ 67,939 $ 51,987
Product 2,909 5,165 8,672 11,002
-------- -------- -------- --------
Revenue before reimbursed
expenses (net revenue) 25,370 24,650 76,611 62,989
Reimbursed expenses 1,243 1,266 3,894 3,104
-------- -------- -------- --------
Total revenue 26,613 25,916 80,505 66,093
Operating Expenses:
Cost of services 14,945 14,232 44,906 42,864
Cost of product 2,169 3,208 6,601 7,924
-------- -------- -------- --------
Cost of revenue before
reimbursed expenses 17,114 17,440 51,507 50,788
Reimbursed expenses 1,243 1,266 3,894 3,104
-------- -------- -------- --------
Total cost of revenue, exclusive
of depreciation and amortization
shown below: 18,357 18,706 55,401 53,892
Selling, general and
administrative 11,959 6,406 36,486 18,761
Severance and related costs 5 385 5 730
Depreciation and amortization 913 641 2,634 1,718
-------- -------- -------- --------
Total operating expenses 31,234 26,138 94,526 75,101
-------- -------- -------- --------
Operating loss (4,621) (222) (14,021) (9,008)
Interest and other income
(expense), net 281 224 1,199 483
-------- -------- -------- --------
(Loss) income before income taxes (4,340) 2 (12,822) (8,525)
Income tax provision (6) (6) (8) (57)
-------- -------- -------- --------
Net loss (4,346) (4) (12,830) (8,582)
Dividends related to Series B
preferred stock (341) (366) (1,070) (1,098)
-------- -------- -------- --------
Net loss available to common
stockholders $ (4,687) $ (370) $(13,900) $ (9,680)
======== ======== ======== ========
Basic net loss per common share $ (0.55) $ (0.05) $ (1.68) $ (1.45)
======== ======== ======== ========
Diluted net loss per common
share $ (0.55) $ (0.05) $ (1.68) $ (1.45)
======== ======== ======== ========
Shares used to calculate basic
net loss per share 8,578 6,792 8,272 6,694
======== ======== ======== ========
Shares used to calculate diluted
net loss per share 8,578 6,792 8,272 6,694
======== ======== ======== ========
Non-cash compensation, primarily restricted stock, included in individual
line items above:
Cost of services $ 187 $ 438 $ 743 $ 1,051
Selling, general and
administrative 2,066 611 7,572 1,561
eLoyalty Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share and per share data)
September 29, December 30,
2007 2006
----------- -----------
ASSETS:
Current Assets:
Cash and cash equivalents $ 24,496 $ 31,645
Restricted cash 1,283 283
Receivables, (net of allowances of $93 and
$93) 13,259 12,816
Prepaid expenses 7,757 5,352
Other current assets 1,648 2,125
----------- -----------
Total current assets 48,443 52,221
Equipment and leasehold improvements, net 6,297 4,793
Goodwill 2,643 2,643
Intangibles, net 804 1,034
Other long-term assets 4,295 3,877
----------- -----------
Total assets $ 62,482 $ 64,568
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 4,782 $ 4,247
Accrued compensation and related costs 4,614 3,479
Unearned revenue 11,199 7,435
Other current liabilities 3,089 4,420
----------- -----------
Total current liabilities 23,684 19,581
Long-term unearned revenue 6,795 5,411
Other long-term liabilities 442 60
----------- -----------
Total liabilities 30,921 25,052
----------- -----------
Redeemable Series B convertible preferred
stock, $0.01 par value; 5,000,000 shares
authorized and designated; 3,752,591 and
4,098,369 shares issued and outstanding with
a liquidation preference of $19,473 and
$21,633 at September 29, 2007 and December
30, 2006, respectively 19,138 20,902
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; 9,927,352 and 9,078,794 shares
issued at September 29, 2007 and December 30,
2006; and 9,818,643 and 9,078,794 outstanding
at September 29, 2007 and December 30, 2006,
respectively 100 91
Additional paid-in capital 170,558 162,059
Accumulated deficit (152,640) (139,810)
Treasury stock, at cost, 108,709 shares at
September 29, 2007 (2,163) -
Accumulated other comprehensive loss (3,432) (3,726)
----------- -----------
Total stockholders' equity 12,423 18,614
----------- -----------
Total liabilities and stockholders' equity $ 62,482 $ 64,568
=========== ===========
eLoyalty Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
For the
Nine Months Ended
---------------------------
Sept. 29, Sept. 30,
----------- -----------
2007 2006
Cash Flows from Operating Activities:
Net loss $ (12,830) $ (8,582)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 2,634 1,718
Non-cash compensation 8,315 2,612
Provision for uncollectible amounts 152 -
Changes in assets and liabilities:
Receivables (473) (2,356)
Prepaid expenses (2,802) (5,648)
Other assets 922 (2,062)
Accounts payable 527 1,892
Accrued compensation and related costs 1,078 (656)
Unearned revenue 5,051 7,360
Other liabilities (1,117) 1,135
----------- -----------
Net cash provided by (used in) operating
activities 1,457 (4,587)
----------- -----------
Cash Flows from Investing Activities:
Sale of short-term investments - 4,000
Capital expenditures and other (3,384) (3,071)
----------- -----------
Net cash (used in) provided by investing
activities (3,384) 929
----------- -----------
Cash Flows from Financing Activities:
Acquisition of treasury stock (3,069) -
Payment of Series B dividends (1,465) (1,464)
Proceeds from stock compensation and employee
stock purchase plans 379 38
(Increase) decrease in restricted cash (1,000) 221
Other 24 -
----------- -----------
Net cash used in financing activities (5,131) (1,205)
----------- -----------
Effect of exchange rate changes on cash and
cash equivalents (91) 260
----------- -----------
Decrease in cash and cash equivalents (7,149) (4,603)
Cash and cash equivalents, beginning of period 31,645 17,851
----------- -----------
Cash and cash equivalents, end of period $ 24,496 $ 13,248
=========== ===========
Non-Cash Investing and Financing Transactions:
Capital lease obligations incurred $ 528 $ -
Capital equipment purchased on credit 528 -
Change in net unrealized security gain 387 -
Supplemental Disclosures of Cash Flow
Information:
Cash refunded for income taxes, net $ 1,155 $ -
eLoyalty Corporation
CALCULATION OF ADJUSTED EARNINGS MEASURE
(Unaudited and in thousands)
For the For the
Three Months Ended Nine Months Ended
------------------ ------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2007 2006 2007 2006
-------- -------- -------- --------
GAAP - Operating loss $ (4,621) $ (222) $(14,021) $ (9,008)
Add back (reduce) the effect of:
Non-cash compensation 2,253 1,049 8,315 2,612
Severance and related costs 5 385 5 730
Depreciation and amortization 913 641 2,634 1,718
Adjusted earnings measure - (loss)
income $ (1,450) $ 1,853 $ (3,067) $ (3,948)
Contact Information: Contact: eLoyalty Corporation Steve Pollema Vice President, Operations and Chief Financial Officer (847) 582-7100