eLoyalty Reports Third Quarter 2007 Results

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(TM) revenue
--  Record $9.8 million of Managed Services revenue
--  Record 60% of our Services Revenue came from Behavioral Analytics(TM)
    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(TM) 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(TM) 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(TM) Service Lines continues to require significant investment. In particular, we invested in excess of $2 million in Behavioral Analytics(TM) 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(TM) 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(TM) service line. The changes, which will be reflected prospectively in our Income Statement, are as follows: