eLoyalty Announces Strong Fourth Quarter 2008 Results

Company Announces 10% Sequential Services Revenue Growth; $842K of Adjusted Earnings; Record Managed Services Revenues; and Record Managed Services Backlog


LAKE FOREST, IL--(Marketwire - February 12, 2009) - eLoyalty Corporation (NASDAQ: ELOY), a leading enterprise customer relationship management (CRM) services and solutions company, today announced financial results for the fourth quarter ended December 27, 2008.

For the fourth quarter of 2008, total revenue was $25.1 million and the net loss was $4.1 million. The net loss available to common shareholders was $0.35 per share. eLoyalty realized "Adjusted Earnings(1)" of $0.8 million for the fourth quarter of 2008. Adjusted Earnings is a non-GAAP measure. For a reconciliation of Adjusted Earnings income to operating loss, see the accompanying schedule.

The following is a summary of revenue by major component:

                  Three Months Ended              Twelve Months Ended
            ------------------------------- ------------------------------
  (000's)   12/27/2008 12/29/2007 % Change  12/27/2008 12/29/2007 % Change
            ---------- ---------- --------  ---------- ---------- --------
Revenue:
  Managed
   Services $   11,374 $   10,331       10% $   42,094 $   38,665        9%
  Consulting
   Services      8,653      9,776      -11%     35,702     49,381      -28%
            ---------- ---------- --------  ---------- ---------- --------
Services
 Revenue        20,027     20,107        0%     77,796     88,046      -12%
  Product        3,926        513      665%      9,777      9,185        6%
            ---------- ---------- --------  ---------- ---------- --------
Net Revenue     23,953     20,620       16%     87,573     97,231      -10%
  Reimbursed
   expenses      1,137        980                3,624      4,874
            ---------- ---------- --------  ---------- ---------- --------
Total
 Revenue    $   25,090 $   21,600       16% $   91,197 $  102,105      -11%
            ========== ========== ========  ========== ========== ========

Q4 2008 Highlights

Fourth Quarter 2008 highlights include:

--  10% sequential increase in Services revenues
--  25% sequential increase in total revenues before reimbursed expenses
--  $842 thousand of Adjusted Earnings (a $2 million sequential
    improvement)
--  Record $11.4 million Managed Services revenues (an 8% sequential
    increase)
--  Record $73.9 million Managed Services Backlog(2)
--  $9.9 million of Behavioral Analytics™  Service deployment bookings
--  23% sequential increase in ICS Consulting revenues
--  Record $14.8 million of revenues from primary Service Lines (ICS and
    the Behavioral Analytics™ Service)
--  $3 million annual reduction in operating expenses as compared to the
    fourth quarter 2008 run rate
    

First Quarter 2009 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.

Based on these factors, eLoyalty currently expects its First Quarter 2009 Services revenues will be approximately $19.5 million.

Conference Call Information

eLoyalty management will host a conference call at 5:00 p.m. ET on Thursday, February 12, 2009. 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 February 26, 2009 by dialing (800) 642-1687 or, for international callers, (706) 645-9291 and entering conference ID number 79895951.

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     Twelve Months Ended
                            ----------------------  ----------------------
                             Dec. 27,    Dec. 29,    Dec. 27,    Dec. 29,
                               2008        2007        2008        2007
                            ----------  ----------  ----------  ----------
Revenue:
  Services                  $   20,027  $   20,107  $   77,796  $   88,046
  Product                        3,926         513       9,777       9,185
                            ----------  ----------  ----------  ----------
    Revenue before
     reimbursed expenses
     (net revenue)              23,953      20,620      87,573      97,231
  Reimbursed expenses            1,137         980       3,624       4,874
                            ----------  ----------  ----------  ----------
Total revenue                   25,090      21,600      91,197     102,105

Operating expenses:
  Cost of services              13,015      13,590      51,613      58,496
  Cost of product                3,080         392       7,945       6,993
                            ----------  ----------  ----------  ----------
    Cost of revenue before
     reimbursed expenses        16,095      13,982      59,558      65,489
  Reimbursed expenses            1,137         980       3,624       4,874
                            ----------  ----------  ----------  ----------
Total cost of revenue,
 exclusive of depreciation
 and amortization shown
 below:                         17,232      14,962      63,182      70,363
  Selling, general and
   administrative                9,870      10,589      43,155      47,075
  Severance and related
   costs                           497       1,328       1,635       1,333
  Depreciation                     927         912       3,845       3,186
  Amortization of
   intangibles                     109          63         340         423
                            ----------  ----------  ----------  ----------
Total operating expenses        28,635      27,854     112,157     122,380
                            ----------  ----------  ----------  ----------

Operating loss                  (3,545)     (6,254)    (20,960)    (20,275)
Interest and other income
 (expense), net                     83         285          70       1,484
                            ----------  ----------  ----------  ----------
Loss from continuing
 operations before income
 taxes                          (3,462)     (5,969)    (20,890)    (18,791)
Income tax benefit
 (provision)                        61          61         (15)         53
                            ----------  ----------  ----------  ----------
Loss from continuing
 operations                     (3,401)     (5,908)    (20,905)    (18,738)
Loss on liquidation of
 subsidiary                       (748)          —        (748)          —
                            ----------  ----------  ----------  ----------
Net loss                        (4,149)     (5,908)    (21,653)    (18,738)
Dividends related to
 Series B preferred stock         (323)       (335)     (1,296)     (1,405)
                            ----------  ----------  ----------  ----------
Net loss available to
 common stockholders        $   (4,472) $   (6,243) $  (22,949) $  (20,143)
                            ==========  ==========  ==========  ==========

Basic loss from continuing
 operations per common
 share                      $    (0.27) $    (0.67) $    (2.02) $    (2.23)
                            ==========  ==========  ==========  ==========
Basic net loss per common
 share                      $    (0.35) $    (0.71) $    (2.21) $    (2.40)
                            ==========  ==========  ==========  ==========

Diluted loss from continuing
 operations per common
 share                      $    (0.27) $    (0.67) $    (2.02) $    (2.23)
                            ==========  ==========  ==========  ==========
Diluted net loss per common
 share                      $    (0.35) $    (0.71) $    (2.21) $    (2.40)
                            ==========  ==========  ==========  ==========

Shares used to calculate
 basic net loss per share       12,772       8,778      10,365       8,399
                            ==========  ==========  ==========  ==========
Shares used to calculate
 diluted net loss per share     12,772       8,778      10,365       8,399
                            ==========  ==========  ==========  ==========

Stock-based compensation,
 primarily restricted stock,
 included in individual
 line items above:
   Cost of services         $     663   $      261  $    3,345  $    1,004
   Selling, general and
    administrative              2,191        1,872      11,335       9,444
   Severance and related
    costs                           —          196         103         196




                          eLoyalty Corporation
                  CONDENSED CONSOLIDATED BALANCE SHEETS
       (Unaudited and in thousands, except share and per share data)

                                                December 27,  December 29,
                                                    2008          2007
                                                ------------  ------------
                          ASSETS:
Current Assets:
  Cash and cash equivalents                     $     27,064  $     21,412
  Restricted cash                                      3,655         2,455
  Receivables, (net of allowances of
   $107 and $110)                                     10,005        11,322
  Prepaid expenses                                     7,783         8,465
  Other current assets                                 1,251         1,074
                                                ------------  ------------
    Total current assets                              49,758        44,728
Equipment and leasehold improvements, net              6,424         7,391
Goodwill                                               2,643         2,643
Intangibles, net                                         611           828
Other long-term assets                                 4,787         4,461
                                                ------------  ------------
    Total assets                                $     64,223  $     60,051
                                                ============  ============

          LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
  Accounts payable                              $      3,904  $      2,997
  Accrued compensation and related costs               4,994         5,555
  Unearned revenue                                    11,525        11,772
  Capital leases                                       1,311           471
  Other current liabilities                            3,336         3,312
                                                ------------  ------------
    Total current liabilities                         25,070        24,107
Long-term unearned revenue                             5,274         7,416
Capital leases                                         2,280         1,020
Other long-term liabilities                              292           605
                                                ------------  ------------
    Total liabilities                                 32,916        33,148
                                                ------------  ------------
Redeemable Series B convertible preferred
 stock, $0.01 par value; 5,000,000 shares
 authorized and designated; 3,619,537 and
 3,745,070 shares issued and outstanding
 with a liquidation preference of $19,107
 and $19,768 at December 27, 2008 and
 December 29, 2007, respectively                      18,460        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; 14,152,702 and 9,885,458
   shares issued at December 27, 2008 and
   December 29, 2007; and 13,661,746 and
   9,735,492 outstanding at December 27, 2008
   and December 29, 2007, respectively                   142            99
  Additional paid-in capital                         198,853       172,483
  Accumulated deficit                               (180,201)     (158,548)
  Treasury stock, at cost, 490,956 and 149,966
   shares at December 27, 2008 and
   December 29, 2007                                  (2,457)       (2,731)
  Accumulated other comprehensive loss                (3,490)       (3,500)
                                                ------------  ------------
    Total stockholders' equity                        12,847         7,803
                                                ------------  ------------
Total liabilities and stockholders' equity      $     64,223  $     60,051
                                                ============  ============




                          eLoyalty Corporation
              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                      (Unaudited and in thousands)

                                                            For the
                                                     Twelve Months Ended
                                                    ----------------------
                                                     Dec. 27,    Dec. 29,
                                                       2008        2007
                                                    ----------  ----------
Cash Flows from Operating Activities:
  Net loss                                          $  (21,653) $  (18,738)
  Adjustments to reconcile net loss to net cash
  (used in) provided by operating activities:
    Depreciation and amortization                        4,185       3,609
    Stock-based compensation                            14,680      10,448
    Loss on liquidation of subsidiary                      748           —
    Provision for uncollectible amounts                     18         168
    Severance and related costs                            293           —
    Deferred income taxes                                   (2)       (129)
  Changes in assets and liabilities:
    Receivables                                          1,140       1,466
    Prepaid expenses                                     1,305      (3,533)
    Other assets                                          (523)      1,622
    Accounts payable                                       919      (1,271)
    Accrued compensation and related costs                (296)      2,057
    Unearned revenue                                    (2,362)      6,233
    Other liabilities                                      112        (550)
                                                    ----------  ----------
      Net cash (used in) provided by operating
       activities                                       (1,436)      1,382
                                                    ----------  ----------

Cash Flows from Investing Activities:
  Capital expenditures and other                          (698)     (4,520)
                                                    ----------  ----------
      Net cash used in investing activities               (698)     (4,520)
                                                    ----------  ----------

Cash Flows from Financing Activities:
  Proceeds from rights offering, net                    14,845          24
  Acquisition of treasury stock                         (3,741)     (3,637)
  Increase in restricted cash                           (1,200)     (2,172)
  Payment of Series B dividends                         (1,317)     (1,468)
  Proceeds from stock compensation and employee
   stock purchase plans, net                               343         422
  Principal payments under capital lease obligations      (748)        (27)
                                                    ----------  ----------
      Net cash provided by (used in) financing
       activities                                        8,182      (6,858)
                                                    ----------  ----------

Effect of exchange rate changes on cash and cash
 equivalents                                              (396)       (237)
                                                    ----------  ----------
Increase (decrease) in cash and cash equivalents         5,652     (10,233)
Cash and cash equivalents, beginning of period          21,412      31,645
                                                    ----------  ----------
Cash and cash equivalents, end of period            $   27,064  $   21,412
                                                    ==========  ==========

Non-Cash Investing and Financing Transactions:
  Capital lease obligations incurred                $    2,429  $    1,518
  Capital equipment purchased on credit                  2,429       1,518
  Change in net unrealized security gain                  (343)        451

Supplemental Disclosures of Cash Flow Information:
  Cash refunded for income taxes, net               $        —  $    1,192
  Interest paid                                           (536)        (97)




                          eLoyalty Corporation
                CALCULATION OF ADJUSTED EARNINGS MEASURE
                      (Unaudited and in thousands)

                                      For the               For the
                                 Three Months Ended   Twelve Months Ended
                                --------------------  --------------------
                                 Dec. 27,   Dec. 29,   Dec. 27,   Dec. 29,
                                   2008       2007       2008       2007
                                ---------  ---------  ---------  ---------
GAAP - Operating loss           $  (3,545) $  (6,254) $ (20,960) $ (20,275)

  Add back (reduce) the effect of:
  --------------------------------
Stock-based compensation            2,854      2,133     14,680     10,448
Severance and related costs           497      1,328      1,635      1,333
Depreciation and amortization       1,036        975      4,185      3,609
                                ---------  ---------  ---------  ---------
Adjusted earnings measure -
 income (loss)                  $     842  $  (1,818) $    (460) $  (4,885)
                                =========  =========  =========  =========

Contact Information: Contact: eLoyalty Corporation Bill Noon Vice President, Chief Financial Officer (847) 582-7019