Three Months Ended Six Months Ended ----------------------------- ----------------------------- (000's) 6/28/2008 6/30/2007 % Change 6/28/2008 6/30/2007 % Change --------- --------- -------- --------- --------- -------- Revenue: Managed Services 9,433 9,664 -2% 20,204 18,495 9% Consulting Services 8,786 13,637 -36% 19,367 26,983 -28% --------- --------- -------- --------- --------- -------- Services Revenue 18,219 23,301 -22% 39,571 45,478 -13% Product 3,117 1,356 130% 4,895 5,763 -15% --------- --------- -------- --------- --------- -------- Net Revenue 21,336 24,657 -13% 44,466 51,241 -13% Reimbursed expenses 808 1,313 1,546 2,651 --------- --------- -------- --------- --------- -------- Total Revenue 22,144 25,970 -15% 46,012 53,892 -15% ========= ========= ======== ========= ========= ========Review of Q2 2008 Results Second Quarter 2008 revenues were adversely impacted by two significant factors compared to First Quarter 2008:
-- $1.1 million decrease in traditional CRM Consulting revenues based on tight spending conditions at several of eLoyalty's longstanding clients -- $0.7 million decrease in Behavioral Analytics™ service Subscription revenues based on the Contract revision at one client; Behavioral Analytics™ Subscription revenues are forecasted to increase by $0.4 million sequentially at this client in the Third QuarterBehavioral Analytics™ Service eLoyalty's Behavioral Analytics™ service converts unstructured customer interaction information into actionable business insight. This Service Line generates revenues as follows:
-- Managed Services revenues from implementing and operating its Behavioral Analytics™ service for its Deployment Customers -- Consulting revenues from Assessments projects for prospective Deployment CustomersBehavioral Analytics™ is a new, transformational business service that is in the early stages of market adoption. In order to accelerate growth of this Service Line, eLoyalty is focused on three key strategies:
-- Building its customer base -- Growing its sales force -- Expanding Behavioral Analytics™ service functionalityKey Q2 highlights include:
-- Closed 3 new Deployments (including a large Utility and a prominent Blue Shield Plan) -- Signed 5 new Assessments (including a large pharmacy benefit manager (PBM), a Retail Bank division of a very large Insurance Company, a large Utility and 2 new applications at an existing large HMO client) -- Added 4 new Sales People -- Significantly expanded the use of customer behavioral data to improve call routingeLoyalty's Behavioral Analytics™ service continues to gain traction. Based on eLoyalty's current Backlog and Assessment activity, the company currently expects to grow its Behavioral Analytics™ Managed Services revenues significantly in the Third Quarter (see Guidance below). In addition, eLoyalty expects to increase Behavioral Analytics™ Managed Services revenues approximately 5% to 10% sequentially in the Fourth Quarter of 2008, and between 20% and 40% on a year over year basis in 2009. Third 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 Third Quarter 2008 outlook include:
-- $1.1 million increase in Behavioral Analytics™ Managed Services revenues -- $0.2 million increase in Behavioral Analytics™ Consulting revenues -- $0.6 million decrease in Traditional CRM Consulting revenuesBased on these factors, eLoyalty currently expects its Third Quarter Services revenues will increase 5% sequentially to approximately $19.1 million. Furthermore, eLoyalty expects to make significant progress transforming its revenue and business model in the Third Quarter of 2008, as evidenced by the following:
-- Approximately 55% of Services revenues are expected to come from Managed Services, up from 44% in the third quarter of 2007 -- Approximately 70% of Services revenues are expected to come from Behavioral Analytics™ and ICS Service Lines, up from 60% in the third quarter of 2007Conference Call Information eLoyalty management will host a conference call at 5:00 p.m. ET on Wednesday, August 6, 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 call is completed until August 20, 2008, 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 55184433. 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.
eLoyalty Corporation CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited and in thousands, except per share data) For the For the Three Months Ended Six Months Ended ------------------ ------------------ June 28, June 30, June 28, June 30, 2008 2007 2008 2007 -------- -------- -------- -------- Revenue: Services $ 18,219 $ 23,301 $ 39,571 $ 45,478 Product 3,117 1,356 4,895 5,763 -------- -------- -------- -------- Revenue before reimbursed expenses (net revenue) 21,336 24,657 44,466 51,241 Reimbursed expenses 808 1,313 1,546 2,651 -------- -------- -------- -------- Total revenue 22,144 25,970 46,012 53,892 Operating expenses: Cost of services 13,576 15,224 26,925 29,961 Cost of product 2,423 918 3,824 4,432 -------- -------- -------- -------- Cost of revenue before reimbursed expenses 15,999 16,142 30,749 34,393 Reimbursed expenses 808 1,313 1,546 2,651 -------- -------- -------- -------- Total cost of revenue, exclusive of depreciation and amortization shown below: 16,807 17,455 32,295 37,044 Selling, general and administrative 11,234 12,089 22,677 24,527 Severance and related costs 283 -- 452 -- Depreciation and amortization 1,092 948 2,055 1,721 -------- -------- -------- -------- Total operating expenses 29,416 30,492 57,479 63,292 -------- -------- -------- -------- Operating loss (7,272) (4,522) (11,467) (9,400) Interest and other income (expense), net 4 591 82 918 -------- -------- -------- -------- Loss before income taxes (7,268) (3,931) (11,385) (8,482) Income tax provision (16) (6) (49) (2) -------- -------- -------- -------- Net loss (7,284) (3,937) (11,434) (8,484) Dividends related to Series B preferred stock (325) (363) (649) (729) -------- -------- -------- -------- Net loss available to common stockholders $ (7,609) $ (4,300) $(12,083) $ (9,213) ======== ======== ======== ======== Basic net loss per common share $ (0.80) $ (0.52) $ (1.31) $ (1.13) ======== ======== ======== ======== Diluted net loss per common share $ (0.80) $ (0.52) $ (1.31) $ (1.13) ======== ======== ======== ======== Shares used to calculate basic net loss per share 9,454 8,203 9,258 8,119 ======== ======== ======== ======== Shares used to calculate diluted net loss per share 9,454 8,203 9,258 8,119 ======== ======== ======== ======== Stock-based compensation, primarily restricted stock, included in individual line items above: Cost of services $ 1,640 $ 260 $ 2,000 $ 556 Selling, general and administrative 3,346 2,195 6,768 5,506 Severance and related costs -- -- 45 -- eLoyalty Corporation CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited and in thousands, except share and per share data) June 28, December 29, 2008 2007 ---------- ---------- ASSETS: Current Assets: Cash and cash equivalents $ 13,507 $ 21,412 Restricted cash 3,655 2,455 Receivables, (net of allowances of $82 and $110) 11,975 11,322 Prepaid expenses 10,587 8,465 Other current assets 1,278 1,074 ---------- ---------- Total current assets 41,002 44,728 Equipment and leasehold improvements, net 7,321 7,391 Goodwill 2,643 2,643 Intangibles, net 764 828 Other long-term assets 4,007 4,461 ---------- ---------- Total assets $ 55,737 $ 60,051 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Accounts payable $ 4,720 $ 2,997 Accrued compensation and related costs 4,005 5,555 Unearned revenue 13,701 11,772 Other current liabilities 3,866 3,783 ---------- ---------- Total current liabilities 26,292 24,107 Long-term unearned revenue 5,321 7,416 Other long-term liabilities 2,267 1,625 ---------- ---------- Total liabilities 33,880 33,148 ---------- ---------- Redeemable Series B convertible preferred stock, $0.01 par value; 5,000,000 shares authorized and designated; 3,631,547 and 3,745,070 shares issued and outstanding with a liquidation preference of $19,169 and $19,768 at June 28, 2008 and December 29, 2007, respectively 18,521 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; 10,640,381 and 9,885,458 shares issued at June 28, 2008 and December 29, 2007; and 10,485,348 and 9,735,492 outstanding at June 28, 2008 and December 29, 2007, respectively 106 99 Additional paid-in capital 178,056 172,483 Accumulated deficit (169,982) (158,548) Treasury stock, at cost, 155,033 and 149,966 shares at June 28, 2008 and December 29, 2007 (1,174) (2,731) Accumulated other comprehensive loss (3,670) (3,500) ---------- ---------- Total stockholders' equity 3,336 7,803 ---------- ---------- Total liabilities and stockholders' equity $ 55,737 $ 60,051 ========== ========== eLoyalty Corporation CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited and in thousands) For the Six Months Ended -------------------------- June 28, June 30, 2008 2007 ----------- ---------- Cash Flows from Operating Activities: Net loss $ (11,434) $ (8,484) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 2,055 1,721 Stock-based compensation 8,813 6,062 Provision for uncollectible amounts (10) 152 Changes in assets and liabilities: Receivables (647) (1,492) Prepaid expenses (1,099) (3,720) Other assets (343) 635 Accounts payable 1,706 2,049 Accrued compensation and related costs (1,386) 722 Unearned revenue (209) 6,765 Other liabilities (488) (693) ----------- ---------- Net cash (used in) provided by operating activities (3,042) 3,717 ----------- ---------- Cash Flows from Investing Activities: Capital expenditures and other (435) (2,191) ----------- ---------- Net cash used in investing activities (435) (2,191) ----------- ---------- Cash Flows from Financing Activities: Acquisition of treasury stock (2,459) (2,307) Increase in restricted cash (1,200) (14) Payment of Series B dividends (669) (737) Proceeds from stock compensation and employee stock purchase plans 211 214 Principal payments under capital lease obligations (332) - Other - 24 ----------- ---------- Net cash used in financing activities (4,449) (2,820) ----------- ---------- Effect of exchange rate changes on cash and cash equivalents 21 (164) ----------- ---------- Decrease in cash and cash equivalents (7,905) (1,458) Cash and cash equivalents, beginning of period 21,412 31,645 ----------- ---------- Cash and cash equivalents, end of period $ 13,507 $ 30,187 =========== ========== Non-Cash Investing and Financing Transactions: Capital lease obligations incurred $ 1,487 $ - Capital equipment purchased on credit 1,487 - Change in net unrealized security gain (142) - Supplemental Disclosures of Cash Flow Information: Cash refunded for income taxes, net $ - $ 1,155 Interest paid (241) - eLoyalty Corporation CALCULATION OF ADJUSTED EARNINGS MEASURE (Unaudited and in thousands) For the For the Three Months Ended Six Months Ended --------------------- -------------------- June 28, June 30, June 28, June 30, 2008 2007 2008 2007 ---------- --------- --------- --------- GAAP - Operating loss $ (7,272) $ (4,522) $ (11,467) $ (9,400) Add back (reduce) the effect of: Stock-based compensation 4,986 2,455 8,768 6,062 Severance and related costs 283 - 452 - Depreciation and amortization 1,092 948 2,055 1,721 ---------- --------- --------- --------- Adjusted earnings measure - income (loss) $ (911) $ (1,119) $ (192) $ (1,617) ========== ========= ========= =========
Contact Information: Contact: eLoyalty Corporation Chris Min Vice President and Chief Financial Officer (847) 582-7222