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Technology Stocks : Dialogic ready to soar, funds buying

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To: Jeffrey L. Henken who wrote (271)	4/17/1997 8:30:00 PM
From: Jay M. Harris	of 674

OK DLGC sports fans Q1 97 EPS Review :-( Financials:Revenues for the quarter were $57.1 million up 17% YOY and off 5% from the $60 million Wall Street was modeling. The 5% revenue shortfall in the quarter came from slow domestic sales which were up only 8% YOY and down 5 million or 13% from q4. International revenues were strong (50% of total) up 40% YOY. Europe grew 27% while asia grew at 53%. Gross Profit was 35.2 million or 61.9% of revenue. R&D was 12.3 million or 21.5% of revenue; SG&A 18.3 mil or 32.2% of revenue. Operating income was 4.7 mil or 8.2% of revenue. This was down from 13.6% of revenue last year and is the poorest performance in the company's history as a public company. Interest income was $350,000. Net income was 3.2 mil or $.20 per share down from eps of $.30 in last years same quarter. As a reminder this quarter is usually DLGC's slowest quarter seasonally. High density products (more than 8 ports) was 60% of revenue while low density was 40%. Low density ports shipped were the culprit here and were down YOY while high density products exhibited 50% growth YOY. Top 10 clients represented 24% of revenue and the top 50 clients represented 50% of quarterly revenue. DSO's increased to 56 days due to a higher % of Intl with longer payment terms as well as a higher % of high density revenue with longer terms. The quarter was not back end loaded. The company is evaluating their approach to seek better balance between short term and long term shareholder interests. They are re-prioritizing projects and initiatives to build a more variable approach with the goal of investing for the future while maintaining expenses in line with revenues. Howard Bubb's Review of Operations: The performance advantages of the Dual Span; Anteries; and CP12 fax products are continuing to win large complex network systems. The new low end product line introduced in 1996 has been very successful in taking back market share from the clones. Port shipments of low end products are up but revenue was down due to price reductions and higher volume discounts with major customers. They have achieved their goal as the low cost producer and have proven their willingness and ability to win against the clones. Their inquiries to date have indicated no design losses among new or existing customers. Further their customers have not reported any significant project losses with end users. Dialogic delivers Just in Time to their clients and carries little firm order back log. They believe this is a valuable service to their customers and avoides fluctuations due to channel inventory but it limits DLGC's visibility. John Alfiery VP Sales Americas: He is NOT pleased with Q1 revenue results. He is quite excited about the new design wins in several application areas involving complex;large; multable technology sales in customer accounts. He believes with the high density business up over 50% that this is a positive indicator that DLGC's business is strong. New design wins include: enhanced services;voice activated dialing;call back; debit card, and wireless messaging. These applications can be quite complex and require very sophisticated support. Several specific causes for the revenue shortfall:Timing and forcast related issues with a number of customers. During q1 a number of long standing customers did not achieve the revenue # that DLGC had been forcasting for them for q1. This is an issue of predictability of forcasting client revenue. The sales forcasting process tracks the top 200 clients which represent 75% of DLGC's business in the Americas by revenue by region. This process is based on the clients ability to predict their own business. As of now they believe that their clients business is all right,but in Q1 they did not take the amount of product that DLGC had anticipated. The clients have indicated that their business with DLGC remains strong,and that they have a strong backlog for the remainder of 1997. The timing related issues were related to a large # of clients of varying sizes. An example is ICS who was in the process of rolling out a very large deployment to MCI.To date this is the largest deployment to a telco or PTT in the world totaling about 50,000 voice ports. DLGC and ICS anticipated a large shipment in q1 in the amount of $750,000. During q1 ICS indicated to DLGC that this order would be delayed until Q4 1997. This single order change alone amounted to 25% of the 3 million shortfall in the Americas. Another reason for the Q1 shortfall can be attributed to the slower than expected volume revenue increase associated with new design wins. These are new clients where DLGC has a design win and the client is in the process of designing DLGC SCSA products into their product offerings. This is a 4 stage process. #1) The decision to go with DLGC or the closure of the design win #2)The actual customer developement process. #3)The launch of the product by the DLGC client and starting the ramp up of volume production shipments to the end user. #4)The actual volume attainment of shipments of the client product to respective end users. The problem in Q1 is that the company met plan with new design wins or stage #1. However, the new clients have taken longer than DLGC would have liked in the subsequent stages. Another example was that Brite Voice Systems ran into technological challenges associated with implementations of DLGC's latest technology. This has caused a delay in the volume shipments. He closed by saying that his entire sales organization in the Americas is committed to achieving DLGC's ORIGIONAL revenue targets over the remainder of 97. Howard Bubb: Stated that DLGC is becomming more conservative regarding the 1997 revenue plan because of the slow start to 97;possibility of further price erosion at the low end, and the ramp up risk in Spectrons Texas Instraments DSP Bios Program. They are trimming internal revenue estimates by about 5 to 6 million for the remainder of 97. They have initiated expense containment actions to protect EPS as much as possible consistant with the strategy to maximize growth of earnings for the long term. They are also pursuing 3 to 4 major new opportunities at this time with strategic partners. These would carry significant committed incremental revenue for 98,99, and 2000. If they win these designs, they will be making investments in R&D outside the normal operating plan for 97.

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