SOURCE: eLoyalty Corporation

November 07, 2007 16:20 ET

eLoyalty Reports Third Quarter 2007 Results

LAKE FOREST, IL--(Marketwire - November 7, 2007) - eLoyalty Corporation (NASDAQ: ELOY), a leading enterprise CRM services and solutions company, today announced financial results for the third quarter ended September 29, 2007.

For the third quarter of 2007, total revenue was $26.6 million and the net loss was $4.3 million. The net loss available to common shareholders was $0.55 per share. eLoyalty realized an "Adjusted Earnings(1)" loss of $1.5 million for the third quarter of 2007. Adjusted Earnings is a non-GAAP measure. For a reconciliation of Adjusted Earnings loss to operating loss, see the accompanying schedule.

The following is a summary of revenue by major component:


                                 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
    Email Contact