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Technology Stocks : Dialogic ready to soar, funds buying
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To: Larry Tomblin who wrote (280)4/21/1997 9:05:00 PM
From: Jay M. Harris   of 674
 
Larry: I have been on the buyside for the last 9 years as a buy and hold
money manager. In the last several years my business has become extremely
competitive with most MM's focusing on short term (quarterly) investment
performance. They focus on the battle while ignoring the war. I remain
committed to the war. However, because I'm competitive in the long term
I focus very closely on areas of the market that offer significant 5
year opportunities. One criteria for companies like DLGC(small cap) is
that they stand a GOOD chance of growing to a billion in revenue over a
long investment horizon. I employ 5 other criteria without fail.
1)Market Share Leadership
2)Low Cost Production (margins)
3)Global;product,and client diversification.
4)Global distribution
5)Management Vision (Very Important)
Dialogic meets all of the above criteria. However, as a banker I have
underestimated the legnth of sales cycles for CTI. I didn't have an
appreciation for the developement effort required to turnkey some of
the more sophisticated implementations of CTI. I obviously am paying
the price in the short term.

When I met this Mngmt team in 94 they impressed me a great deal with a
30% growth track record from 1983. They founded CTI and they retain
an approximately 7 million share stake in the company. By the way, they
are down 280 million from the high on their investment, yet they hold
for the long term. Because I and many on the board payed for a 30%
growth rate, we are down on our investment when the company delivers
17%. This happens frequently in business and should not discourage you
if the reasons you purchase the company are still in place.
Dialogic retains all of the elements I require to remain committed for
the long term. However, I would have to conceed that the probability
of them growing to 1 billion in revenue is reduced. I still believe it
is 60%, but I had origionally assigned 80%.

There are several reasons for my reduction in confidence:
1) I have heard from some on this board and others in the field that
DLGC doesn't have good software developement. This troubles me greatly.
I do believe that Howard MUST get a better handle on software developement
to reach the 1 billion mark. They are currently the king in hardware which
is important but they need great software to speed time to market.
2) The sales cycles are much longer than I expected. This provides a
window of opportunity for a Lucent to swarm in and buy market share with
their clout in the public carrier market. I still feel very good
about DLGC in the corporate space. However, I was counting on the
public space from deregulation to help DLGC achieve their growth. I
still am, but I'm reducing the probability.
3) This management team's stregnth is engineering, NOT finance. Also, I
don't believe they have depth of management. Contrary to others
on the board I think Howard is a great CEO. I just think they need
more great managers to ensure that they capture the opportunity
ahead of them. I see that they just hired Lucent's general council.
Finance guys are easier to pick up and DLGC could use some depth on
this front.

For Newbies to CTI the above factors are on my radar screen and are NOT
reasons to SELL DLGC at this ridiculous valuation or a 14.8 PE on cal
97 eps of $1.35 Hope this helps those on the board through some very
challenging times. Stay the course! Happy Investing
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