Ok DLGC sports fans, another solid report out of New Jersey!
Financial: Revenues grew 24% YOY and 8.3% sequentially from q2 1997. Channel growth was 21% YOY in the Americas; 30% in the rest of the world. Product mix was 54% high density and international was 32% of total high density. DLGC believes they are continuing to gain market share in the core CT segments. Sequential growth was strong in the America's both domestic and Latin America. Top 10 clients represented 22.5% of revenue and no client accounted for 4% of revenue. GPM was strong at 62.4%. The YOY improvement in GPM was 3.4% due to internal cost reductions and margins improving in the low density product line. Operating expenses improved growing 2.1% sequentially Vs 8.3% growth in revenue. SG&A was 28.5% of revenue Vs 31.8% of revenue in q2 which is a 3.3% improvement. They are having success bringing spending in line with revenue growth. Looking at the balance sheet, cash flow as measured by the increase in cash position was 8.3 million over q2. DSO's continued to improve coming in at 52 days and inventory turns improved by .2 points. On balance, the company is headed in the right direction and this was a strong financial quarter. Thanks Tom!
Operations review from Howard Bubb: All CT products experienced revenue growth within plan. They are particularly pleased that they are continuing to gain share in the CT market given their larger size. The DM3 IP link product for IP telephony is shipping to developers and they are anticipating that they will begin to see revenue in the high growth IP telephony market. Europe and Asia were strong in q3 and accounted for 32% of revenue. The dual span product after one year on the market still has twice the density of any competitive product on the market today. Dialogic announced and shipped the production version of their PCI product for both SUNW and INTC platforms. Cynetics is a recent example of a new client win from the competition because of DLGC's PCI leadership. DM3 media stream processor is in client hands being qualified for Voice; Fax; ISDN; and voice over IP applications as well as custom development. The product has demonstrated performance, modular scalability, open development tools, and a growth plan in excess of paper products only recently articulated and outlined by the competition.
In September DLGC won the 1997 product of the year award for the DM3 fax product. It is the first and only product that can deliver a full span of fax with a full transmit receive capability, and other essential network grade fax features. DLGC announced availability of their new OC3 ATM card. This card supports 125 and 25 megabit rates for both high performance and inexpensive desktop ATM applications. It provides 1024 connections with ATM hubs from vendors such as CISCO, FORE,COMS; MADGE and NEC. This enables clients to build large virtual call centers and switches that can be distributed over a wide area. These products are scaleable to thousands upon thousands of lines. Two vendors are now building complex ATM systems based on this new product. DLGC's IP link product is being well received by next generation Telco's seeking a scaleable standards based solution. IP Link was the only Gateway at VON with G723.1 and H323 standards compatability; single slot scalability; and able to demonstrate compatability with other standards based products like Vocaltech's Iphone and MSFT's Netmeeting.
DLGC's low density products continue to experience excellent unit volume growth. A significant win was Comdials conversion to DLGC from NMSS. DLGC is aggressively reducing prices to increase the penetration of CT in small systems while also reducing their cost to retain margins.
DLGC's software business continues to make important progress in the quarter. CT connect has achieved wide spread adoption adding another PBX vendor, releasing version 2 product with Windows NT and SCO unix support and capability for TAPI 2.1 which is the latest TAPI version available from MSFT. The Texas Instruments DSP BIOS program in DLGC's Spectron division has been gaining acceptance from other key developers in the DSP market. They had excellent presence at DSP world in close coordination with Texas Instruments in the 3rd quarter.
In summary, DLGC's investments in development continue to pay off. They are demonstrating product leadership in virtually every category of CT including: Voice; Fax; ASR;text to speech,and CTI digital network products all offer superior density and performance in almost every regard and their CT market share is increasing accordingly.
DM3 platform has established a substantial lead in availability and performance and is shipping while the competition is talking about their next generation plans.
Q&A: The fax market is growing faster at the high end where DLGC believes they are growing market share. Microsoft exchange is providing improved support for corporate based fax solutions which is helping market growth. The growth rate is growing at 25%.
Cynetics and Comdial came to DLGC from NMSS and Rhetorex respectively. These are nice market share wins. Celnet and Atrium also came over from NMSS as well as several other smaller competitive accounts.
The Internet space has shipped over one thousand low end gateways with low revenue $100,000,and the high end beginning to ramp this fall once qualified by their large developer customers. Spectron is performing to plan and in 1998 shipping in volume the Spectron TI Bios .
OPINION: While this was a great quarter from a financial point of view the stock has now bounced 200% from $17 in April 5 months ago. The easy money has been made. However, as you may surmise from the above review there is a heck of a lot of economic opportunity out there. Also, Voice over the internet is being hyped like nothing I've seen since the "internet hype". Finally, the Delta force crowd is starting to appear at the valuation doorstep. These are the Mutual Fund momentum junkies that study the second derivetive or the rate of change of the rate of change. This is a funny lot as they know NOT what they buy in the long run. They will buy GPM momuntum; Earnings Estimate Revision Momentum and care not what the company can do for them, but what they can do for the company :-).
I know this crowd well as they are my friends and must be respected in the short run. They shall not get any of my shares.
I'm upping my 12 month target to $60. This is based on the margin improvement evidenced since Tom has rode into town. This will continue and many of the engineers on this board that don't understand finance would be well served to respect this last point. These margin improvements are very real and will continue. SG&A is on Ultra Slim Fast. This price target should be achieved once the street gets evidence of the product acceptance of VoIP. As I said in the prior note, I've underestimated the size of this market. These products should gain momentum in 12 months. However, DLGC's stock price will discount this activity in advance based on order activity of large high density design- ins.
I will adjust my EPS estimates once I've had a chance to tweak the SG&A and GPM lines.
Hope this post helps,
Happy Investing,
Jay |
