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

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 (80... 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(TM) 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:
eLoyalty Corporation
Bill Noon
Vice President, Chief Financial Officer
(847) 582-7019
Email Contact

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