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Technology Stocks : Dialogic ready to soar, funds buying
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To: Jay M. Harris who wrote (273)4/17/1997 9:49:00 PM
From: Jay M. Harris   of 674
 
Analysis of q1 1997 eps report.

Well here I go again sticking my neck out with the absolute worst
return on investment in my career in the CTI industry. For the record,
I have never been hammered over 3 years in the same stock like I have
by buying and holding DLGC. This company will literally make or brake
me over the next 3 years because I'm staying the course. I hope my wife
doesn't leave me first and run off with some cab driver. Lord knows he
probably has a better return on investment.

In any event, this shortfall smells like the prior 2 in the first
quarter of 95 and the second quarter of 96. On both occasions,buying
DLGC after the miss proved rewarding if you would exersize a trading
strategy. After the first miss the stock increased 4 fold in less than
a year. Then a 75% move within six weeks following the second miss.
There are 2 differences with this miss. #1) The EPS miss was more pronounced
than the first 2 as expenses are running at record levels. #2)Howard
Bubb is learning how to manage Wall Street expectations by guiding them
down to more conservative growth rates. This increases the possibility
of a positive varience and reduces the probability of negative surprise.
This observation will allow the P/E to expand with more consistant EPS
reports.

IMO this company is in a very good competitive position with the new
products that will be rolling out in 97 taking advantage of the better
DSP performance and faster time to market. However, this is clearly the
most challenging company that I have ever followed. They have little
or no backlog; extending sales cycles associated with larger high
density design wins(lumpy revenue);and no way to analyze the size of
their various market opportunities. This company is very tight lipped
with regard to fundamental business guidence. This is why I can't
understand the Goldman Sachs fiasco. These privledged shareholders do
bother me, but I have exercised too much due diligence on this company
to pull back now. To He.. with the get rich quick crowd at Goldman.
This market is too large for me to get distracted with such dirt.

I am reducing cal 97 eps from $1.56 to $1.35. This requires a cut in
cal 98 to $1.75 and a reduction in the P/E to 25X yielding a new 12
month target of $43 or 25X cal 98 eps of $1.75

Caution: Dialogic may have significant new design activity in cal 97
that requires R&D spending in excess of the 20% guidence in the model.
This is to procure major incremental revenue opportunities through out
the remainder of the decade. This could cause a flat EPS year in 97 with
incremental growth in 98. Only invest in this company with a long term
time frame. i.e. 3 to 5 years. As always, I am long DLGC, happy investing.
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