DH CORPORATION Management s Discussion and Analysis For the quarter ended March 31, 2016

Transcription

1 DH CORPORATION Management s Discussion and Analysis For the quarter ended March 31, 2016 D+H Q

2 Management s Discussion and Analysis For the quarter ended March 31, 2016 Page 1 Introduction 3 2 Business overview 4 3 Objectives, strategy and outlook 4 4 Consolidated financial performance 7 5 Business segment financial results 10 6 Summary of consolidated quarterly results 18 7 Capital structure and liquidity 20 8 Changes in financial position 23 9 Significant accounting policies and accounting standards developments Definitions and reconciliations Disclosure controls and procedures and internal controls over financial reporting Business risks 31 D+H Q

3 MANAGEMENT S DISCUSSION AND ANALYSIS 1 INTRODUCTION Our discussion in this Management s Discussion and Analysis ( MD&A ) is qualified in its entirety by the Caution Concerning Forward- Looking Statements that follow. Throughout this MD&A, DH Corporation and its subsidiaries are referred to as D+H, Company, we, our or us. 1.1 Caution concerning forward-looking statements This MD&A contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ( forward-looking statements ). Statements concerning D+H s objectives, goals, strategies, priorities, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of D+H are forward-looking statements. The words believe, expect, anticipate, estimate, intend, may, will, would, could, should, continue, goal, objective, and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forwardlooking statements contain these identifying words. Risks related to forward-looking statements include, among other things, those that can be found on the Company s most recently filed Annual Information Form and the most recently filed annual MD&A for the year ended December 31, 2015, copies of which are available on SEDAR at Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The documents referred to herein also identify additional factors that could affect the operating results and performance of the Company. Forward-looking statements are based on management s current plans, estimates, projections, beliefs and opinions, and D+H does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change except as required by applicable securities laws. D+H has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While D+H considers these factors and assumptions to be reasonable based on information available at that time, there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause D+H s actual results, performance or achievements, or developments in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. All of the forward-looking statements made in this MD&A are qualified by these cautionary statements and other cautionary statements or factors contained herein and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. 1.2 Preparation of the MD&A This MD&A has been prepared with an effective date of April 26, The sections that follow are a discussion of D+H s financial condition and results of operations for the three months ended March 31, 2016, and should be read in conjunction with D+H s MD&A for the year ended December 31, 2015, dated February 23, 2016, and the unaudited condensed interim consolidated financial statements of D+H for the three months ended March 31, Our unaudited financial results are reported in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). Our use of the term IFRS in this MD&A is a reference to these standards. In our discussion, we also use certain non-ifrs financial measures to evaluate our performance, monitor compliance with debt covenants and manage our capital structure. These non-ifrs measures include Adjusted revenues, EBITDA, Adjusted EBITDA, Adjusted net income, Adjusted net income per share, Adjusted net cash from operating activities, constant currency, Debt to EBITDA ratio, and Interest coverage ratio. These measures are defined, qualified, where applicable, and reconciled with their nearest IFRS measures in section 10. All amounts in the MD&A are in Canadian dollars, unless otherwise specified. As part of its consolidated statements of income, D+H provides an additional IFRS measure for Income from Operating Activities. Management believes that this measure provides relevant information to understand the Company s financial performance. This additional IFRS measure is representative of activities that would normally be regarded as operating for the Company. The MD&A and the unaudited condensed interim consolidated financial statements were reviewed by D+H s Audit Committee and approved by the Board of Directors on April 26, Additional information relating to the Company, including the Company s most recently filed Annual Information Form, is available on SEDAR at Comparative figures have been reclassified to conform to the current period classification, where applicable. 1.3 Variability of our results With the inclusion of several new service areas arising from acquisitions made over the last several years, we have and expect to continue to experience some increase in variability in quarterly revenues, EBITDA, net income and cash flows, due to, among other items: (i) dynamics in the United States ( U.S. ), Canadian, and global lending environments; (ii) cheque order volume declines; (iii) volume variances and fees within the mortgage origination and lien registration markets; (iv) timing and variability in sales activity, including professional services work, and cash receipts; and (v) acquisition and integration activities. Quarterly variability is also driven by business and economic cycles in addition to timing of client decisions related to technology investments. With the acquisition of Harland Financial Solutions ( HFS ) in 2013 and Fundtech Investments II, Inc. ( Fundtech ) in 2015, the fourth quarter typically will have the highest revenue and EBITDA for the L&IC and GTBS segments. Given that D+H reports its consolidated results in Canadian dollars, the relative value of the Canadian dollar has an impact on our reported results and year-over-year performance primarily for U.S. operations when translated into Canadian dollars and also, to a limited extent, the Canadian operations to the degree that goods and services are sourced from the U.S. Since late 2014, the Canadian dollar has depreciated against the U.S. dollar, reflecting widespread strength of the U.S. currency. With the acquisition of Fundtech, our results are also impacted, although to a lesser extent, by the relative value of various currencies including Israeli New Shekel, Indian Rupee, Euro and British pounds sterling, against the U.S. dollar. The Company uses various economic hedging strategies for its debt and its U.S. dollar cash flows and will continue to deploy these strategies in the future. The Company does not hedge all expenditures but rather only a portion of forecasted future cash outflows. Additional information on the Company s hedging strategies can be found in section 7 of this MD&A. D+H Q

4 2 BUSINESS OVERVIEW D+H (TSX: DH) is a leading financial technology provider the world's financial institutions rely on every day to help them grow and succeed. Our global transaction banking, lending, payments and integrated core solutions are trusted by nearly 8,000 banks, specialty lenders, community banks, credit unions, governments and corporations. Headquartered in Toronto, Canada, D+H has more than 5,500 employees worldwide who are passionate about partnering with clients to create forward-thinking solutions that fit their needs. With annual revenues in excess of $1.5 billion, D+H is recognized as one of the world's top FinTech companies on IDC Financial Insights FinTech Rankings and American Banker's FinTech Forward rankings. Today, the Company offers software products and other solutions and services in the following areas: Global Transaction Banking Lending and Integrated Core Canada Solutions Global Payment Technologies (Global and U.S. Domestic) Cash Management Financial Messaging Merchant Services Clients Global financial institutions and large corporate clients Over 1,000 clients globally Operations Global operations team based in the U.S., EMEA, APAC Solutions Integrated Core Solutions Core Banking Channel and Optimization Solutions Lending Solutions Mortgage Lending Consumer Lending Commercial Lending Clients United States based financial institutions including banks and credit unions and other lenders Over 5,500 clients in the United States Operations U.S. operations team based in several states Solutions Payments Solutions Cheque Program Enhancement Services Lending Solutions Mortgage Technology Collateral Management Solutions Student Lending Clients Canadian financial institutions and corporate clients Over 1,000 clients in Canada Operations Canadian operations team based in Ontario and British Columbia, Canada 3 OBJECTIVES, STRATEGY AND OUTLOOK Objectives and Strategy Our strategy is to build market-leading positions in growing markets in the financial services industry and to reinforce these positions with integrated technology solutions that deliver increasing value to our clients. In 2016, the Company is focused on advancing the following strategies through various business activities: Build on GTBS leading global position in payment technologies, including payment hubs, financial messaging solutions, cash management and merchant services. The Company signed a key contract with one major European bank and a system integrator for the first Payment Hub installation for a payments as a service platform in Europe. Build on L&IC s leading capabilities in lending and integrated core solutions The Company continues to invest in additional functionality and certain next generation technology in lending solutions. Shortly after the quarter we announced the release of new commercial origination and processing functionality for LaserPro. Defend core market positions in Canada while expanding into additional customer segments and value propositions Realized significant growth in our subscription-based Enhancement Services product, and Collateral Management Solutions primarily due to the onboarding of new clients in The Company has been selected by the Government of Canada to provide financial solutions and related services for the Canada Student Loans Program ( CSLP ), and five integrated provincial programs. The new contract will be effective on April 1, 2018 and the current contract is expected to be extended to this date. Invest in our business to promote long-term revenue growth and increase operating efficiency Continued investment in our leading Global Payment Technologies solutions in response to the ongoing market evolution to faster payments and real time settlement. D+H Q

5 Continued investment in our SaaS-based registry platform for our Collateral Management Solution. Continued investment in our existing data center operations and corporate systems to better support our expanded global operations. Continued investment in risk management by expanding our information security, regulatory compliance and risk management resources. Continue to align the Company around a common brand The Company continued to build the D+H brand in the payments and treasury markets globally through various digital, advertising and event programs. Shortly after the quarter, we hosted a large number of EMEA banks and corporates at our largest ever Insights EMEA customer event in London, UK. Effective use of capital resources Continued investment in our products, platforms and infrastructure, investing $21.0 million in the quarter. Returned $24.8 million of capital to investors through the payment of cash dividends and $9.3 million to participants in the DRIP. Repaid a total of $20.0 million of debt since January 1, Initiated a realignment of our global operating structure to achieve more effective global operations and cost synergies which will increase our overall return on capital from our acquisitions of both HFS and Fundtech. 3.2 Outlook In 2016, the Company intends to continue with the strategy outlined under Section 3.1. In addition, the Company will focus on the following initiatives: Disciplined and strategic focus on stronger organic revenue growth. Enhancing capabilities in software engineering and product management, including employing agile development practices across our main product groups; Increasing investment in innovation and next generation financial technologies; Evolving our business model and strategic capabilities to more effectively manage a global business; Reducing operating costs while increasing operating effectiveness; and Continuing to strengthen our risk management practices, specifically in information security and U.S. regulatory compliance capabilities. Although the Company continues to include acquisitions as part of its long-term growth and diversification strategy, the Company s focus in the near term will continue to be the integration of the GTBS segment, cross-selling, reduction of leverage and operating efficiencies. Segment Outlook GTBS Our outlook for the GTBS segment revenue is positive with growth in the high single digits. We continue to have positive momentum in our Global Payment Technologies with strong industry tailwinds where we expect to see double digit growth. We continue to see demand for our payment solutions as we provide banks with a competitive value proposition that help them consolidate multiple payment types onto a consolidated platform, all offered by real time capability. We anticipate seeing growth across multiple models globally. The strong growth in these products is partially offset by lower growth collectively in financial messaging, merchant services, and cash management. Lending and Integrated Core (L&IC) In our integrated core business, we will see revenue growth from our bookings in 2015 as implementations are completed during the year. We expect revenues from hosted solutions and channel solutions to continue to have the strongest growth. The Company also continues to develop and simplify its technology offerings to meet changing market demand for these products. Our lending solutions business today has over 4,000 clients, many of which are LaserPro clients in addition to other products. We typically have a very high retention rate of LaserPro contract renewals, and in 2015 retained 96% of the clients and 97% of the value for clients renewing in the year. The LaserPro contracts range in term from 3 7 years and occasionally longer. The average term of the portfolio of contracts is approximately 4.4 years, however, the contract maturities are not evenly distributed from year to year. The calendar years 2014 and 2015 had a higher proportion of contracts renewing than is expected in In 2016, only approximately 10% of our LaserPro contracts are maturing in the year, therefore, we anticipate lower revenues from contracts renewing in 2016 with an increase in We do not anticipate a change in the renewal rates we have experienced since the HFS acquisition. The deceleration of maturities of existing contracts will likely result in an overall reduction in revenue and EBITDA growth in the lending solutions business in the year primarily due to the multiple element accounting for these term contracts where a significant portion of the revenues are recorded under IFRS in the initial year of the contract. However, since these contracts are billed and collected annually over the term of the contract, we expect to see an increase in the cash generated from our business, even with D+H Q

6 current year revenue decreases, due to the new contract bookings in 2014 and The cash generated in this product is expected to grow in the mid single digits annually as a result of the growth in bookings since the acquisition of HFS. In the past two years, we have focused on cross selling our lending products to clients from our HFS, Avista and Mortgagebot acquisitions and had successes in cross selling products in conjunction with LaserPro renewals. Our focus in lending in 2016 will be on broadening the use of our new LaserPro origination and processing capability for commercial lending, broadening our customer base and continuing our cross-sell efforts to our US client base, including our GTBS clients. The revenue and billing cadence of this business segment is incorporated in our consolidated outlook for the year. Canada In our payments solutions, our Enhancement Services revenue will continue to benefit from the onboarding of a new client at the end of the first quarter in In addition the increases in average order value in the cheque program, are expected to continue to partially offset ongoing cheque order volume declines which are expected to continue in the high single digits. The Company is focused on marketing and business development initiatives to increase new clients, particularly business cheque clients and to implement efficiency and cost reduction initiatives to increase the profitability in this business. In our lending solutions business, we are expecting our collateral management solutions revenues to continue to benefit from a new major contract effective in the third quarter of Volumes in the registry business and recovery business remain solid, and are typically strongest in the second and third quarters. We are cautious with respect to the volumes in these businesses in the balance of the year, and we anticipate that broader economic status in Canada will influence the mix of revenues and as a result EBITDA. Mortgage origination revenues for the year are also expected to be influenced by the housing market and mortgage refinancing activity in Canada. We remain watchful on these activities and value levels although volumes in the first quarter were strong and up compared to the same quarter last year. With the success of the CSLP program contract, the Company will turn its activities toward preparing the new platform and technology solution for implementation in Capital investments To support our near to long term growth and operations, we also plan to invest approximately $100 million to $120 million in capital asset additions in 2016, with a focus on new growth opportunities from new solutions in addition to normal renewal of hardware and software infrastructure and the ongoing enhancement of our Lending and Payments products and enterprise-wide systems. Capital asset additions may vary based on spending in support of new growth opportunities if and as they arise, and the timing of opportunities during the year. Cost Synergies Management has initiated a review of the operating structure to realign operations to operate more effectively on a global basis. During the quarter, the Company recorded a $6.8 million expense primarily consisting of consulting, severance and other costs related to the Company s initiatives to align global operations and achieve cost synergies. These activities will continue throughout D+H Q

7 4 CONSOLIDATED FINANCIAL PERFORMANCE 4.1 Consolidated operating results (In thousands of Canadian dollars, unless otherwise noted) Three months ended March 31 Statement of income $ Change % Change Revenues $ 412,149 $ 295,014 $ 117, % Expenses 319, , , % EBITDA 1 92,249 93,969 (1,720) (1.8%) EBITDA margin % 31.9% (9.5%) Depreciation of property, plant and equipment 7,254 4,376 2, % Amortization of intangible assets 69,416 38,062 31, % Income from operating activities 15,579 51,531 (35,952) (69.8%) Finance expense 26,476 14,430 12, % (Loss) / income before income taxes (10,897) 37,101 (47,998) (129.4%) Income tax (recovery) / expense (15,684) 3,104 (18,788) (605.3%) Net income for the period $ 4,787 $ 33,997 $ (29,210) (85.9%) Weighted average number of shares outstanding during the period (in thousands) 106,472 86,406 20, % Shares outstanding at end of period (in thousands) 106,779 86,591 20, % Net income per share, basic and diluted $ 0.04 $ 0.39 $ (0.35) (88.6%) Other non-ifrs measures Adjusted revenues 1 $ 414,187 $ 296,531 $ 117, % Adjusted EBITDA 1 $ 102,967 $ 86,970 $ 15, % Adjusted EBITDA margin % 29.3% (4.4%) Adjusted net income 1 $ 45,436 $ 47,360 $ (1,924) (4.1%) Adjusted net income per share, basic 1 $ 0.43 $ 0.55 $ (0.12) (22.1%) Liquidity Net cash from operating activities $ 54,773 $ 9,822 $ 44, % Add: Acquisition related and other charges $ 12,445 $ 9,451 $ 2, % Adjusted net cash from operating activities 1 $ 67,218 $ 19,273 $ 47, % Adjusted net cash from operating activities as a percentage of Adjusted revenues % 6.5% 9.7% Adjusted net cash from operating activities per weighted average share outstanding 1 $ 0.63 $ 0.22 $ % Uses of Adjusted net cash from operating activities: Capital expenditures $ 20,962 $ 27,674 $ (6,712) (24.3%) Cash dividends $ 24,753 $ 20,536 $ 4, % Adjusted net cash from / (used in) operating activities after capital expenditures and cash 1 dividends $ 21,503 $ (28,937) $ 50,440 (174.3%) Net debt repayment $ 20,000 $ - $ 20, % Adjusted net cash from / (used in) operating activities after capital expenditures, cash 1 dividends and net debt repayment $ 1,503 $ (28,937) $ 30,440 (105.2%) Dividends declared per share $ 0.32 $ 0.32 $ - - March 31 December 31 Capital structure $ Change % Change Loans and borrowings $ 1,525,771 $ 1,636,922 $ (111,151) (6.8%) Convertible debentures $ 424,527 $ 422,576 $ 1, % Total equity $ 2,210,652 $ 2,369,066 $ (158,414) (6.7%) Debt to EBITDA x 3.19x n/a 1. Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 10.1 for additional information and reconciliation to IFRS measures. D+H Q

8 Our revenues are further broken down by service areas as follows: (In thousands of Canadian dollars, unless otherwise noted) Three months ended March 31 Revenues by service area Lending solutions $ 164,644 40% $ 158,084 54% Global transaction banking solutions 94,190 23% - - Payments solutions 79,597 19% 73,747 25% Integrated core solutions 73,718 18% 63,183 21% Total revenues $ 412, % $ 295, % Three months ended March 31 Adjusted revenues by service area Lending solutions $ 165,463 40% $ 159,456 54% Global transaction banking solutions 95,251 23% - - Payments solutions 79,597 19% 73,747 25% Integrated core solutions 73,876 18% 63,328 21% Total Adjusted revenues 1 $ 414, % $ 296, % 1. Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 10.1 for additional information and reconciliation to IFRS measures. Revenues and Adjusted revenues Revenues on a consolidated basis for the first quarter of 2016 increased $117.1 million or 39.7%, primarily due to the inclusion of the GTBS segment of $94.2 million acquired April 30, 2015, the strengthening of the U.S. dollar in our L&IC segment which increased revenues by $14.1 million, and organic growth in our Canadian segment which contributed $12.1 million compared to the prior year period. Expenses Consolidated expenses increased by $118.9 million or 59.1% in the first quarter of 2016 compared to prior year. The increase was primarily attributable to the inclusion of the GTBS segment expenses of $72.5 million, the strengthening of the U.S. dollar in our L&IC segment which increased expenses by $10.2 million, and increases in expenses in our Canadian segment attributable to the direct costs associated with enhancement services and our collateral management solutions business, which are consistent with the increase in revenues. In addition, in the first quarter of 2016, we incurred $6.8 million of costs related to the Company s initiatives to align global operations and achieve cost synergies following D+H s acquisitions, including Fundtech in We expect to incur additional costs in 2016 related to our global operations workforce alignment. We also incurred expenses related to business integration costs of $5.2 million incurred primarily in connection with the acquisitions of Fundtech. EBITDA and Adjusted EBITDA EBITDA for the first quarter of 2016 decreased $1.7 million, or 1.8%, to $92.2 million from $94.0 million in the first quarter of 2015, primarily due to $6.8 million of costs related to the Company s initiatives to align global operations and achieve cost synergies following D+H s acquisitions, including Fundtech in 2015, an increase in business integration costs incurred in connection with the acquisition of Fundtech, and a decrease in L&IC lending revenues. The first quarter of 2015 included a gain related to HFS closing working capital settlement of $5.5 million, and a non-cash foreign exchange gain of $15.6 million for finance related intercompany balances in the first quarter of 2015, compared to a foreign exchange gain of $1.2 million in the first quarter of These impacts to EBITDA were partially offset by the inclusion of our GTBS business EBITDA of $21.7 million, an increase in revenues from our Canadian segment, and the strengthening of the U.S. dollar in our L&IC segment. In addition, we incurred $2.2 million in customer related costs in the L&IC segment that are not expected to recur. Adjusted EBITDA, which removes from EBITDA the impacts of the acquisition accounting adjustments, acquisition-related and other charges, costs related to our global operations alignment, and foreign exchange gain or loss on finance related intercompany balances, grew by $16.0 million, or 18.4%, for the first quarter of 2016 compared to the first quarter of 2015, driven by $22.1 million contribution from the inclusion of GTBS, $3.8 million due to the strengthening of the U.S. dollar in the L&IC segment, and $0.3 million from the growth in the Canadian segment, offset by $10.2 million decrease in the Adjusted EBITDA for L&IC excluding the impact of foreign exchange. EBITDA margin and Adjusted EBITDA margin During the first quarter of 2016, EBITDA margin decreased by 9.5% primarily due to the increase in expenses as discussed above, a gain related to HFS closing working capital settlement in the first quarter of 2015, and a non-cash foreign exchange gain on finance related intercompany balances as discussed above. Adjusted EBITDA margin decreased by 4.4% in the first quarter of 2016 primarily due to the inclusion of the GTBS segment which historically has had lower margins than the existing D+H business, the change in sales mix in lending solutions in our L&IC and Canadian segment, certain revenues in the first quarter of 2015 in our Canadian segment related to our Student Lending repayment assistance program and mortgage origination business which did not recur, and $2.2 million of customer related costs in the L&IC segment that are not expected to recur. We expect our margins to improve through 2016 back to approximately our 30% consolidated margin level. D+H Q

9 Depreciation of capital assets and amortization of intangible assets (In thousands of Canadian dollars, unless otherwise noted) Three months ended March $ Change% Change Depreciation of property, plant and equipment $ 7,254 $ 4,376 $ 2,878 66% Amortization of intangible assets Contract $ 1,096 $ 409 $ % Software 12,305 6,591 5,714 87% Intangible assets from acquisition 56,015 31,062 24,953 80% Total amortization of intangibles $ 69,416 $ 38,062 $ 31,354 82% Total depreciation of property, plant and equipment and amortization of intangibles $ 76,670 $ 42,438 $ 34,232 81% Depreciation of property, plant, and equipment, and amortization of non-acquisition related intangible assets increased in the first quarter of 2016 by $2.9 million and $6.4 million, respectively, compared to the first quarter of 2015 primarily due to the inclusion of the GTBS segment (Q1 2016: $5.1 million), the impact of increased investments in the L&IC and Canadian segment throughout 2015, as well as the strengthening of the U.S. dollar compared to the prior year. Consolidated amortization of acquired intangible assets for the first quarter of 2016 increased by $25.0 million compared to the first quarter of 2015 primarily due to the inclusion of the GTBS segment (Q1 2016: $22.4 million) and the strengthening of the U.S. dollar compared to the prior year. A significant portion of intangible assets in this category are from previous acquisitions and are denominated in U.S. dollars. Finance expense Finance expense is comprised of interest expense and financing related charges as detailed in the table below. (In thousands of Canadian dollars, unless otherwise noted) Three months ended March $ Change % Change Interest expense $ 24,019 $ 12,492 $ 11,527 92% Amortization of deferred financing fees (76) (11%) Accretion expense 2, , % Fair value adjustment of derivative instruments (300) 225 (525) (233%) Total finance expenses $ 26,476 $ 14,430 $ 12,046 83% Interest expense increased by $11.5 million in our first quarter of 2016 primarily due to an increase of $12.1 million from the increase in outstanding borrowings compared to the same prior year period in 2015, of which, $1.5 million was due to the strengthening of the U.S. dollar as our debt is primarily denominated in U.S. dollars. The increase in accretion expense is due to the increase in convertible debentures from the acquisition of Fundtech. Income tax (recovery) expense An income tax recovery of $15.7 million was recorded for the first quarter of 2016 compared to an income tax expense of $3.1 million recognized in the same period of The decrease in income tax expense was primarily attributable to a decrease in income before income taxes and changes in the geographic mix of income and losses. The tax expense was further reduced by changes in statutory tax rates and withholding tax accruals. In addition, there were non-deductible transaction costs related to the acquisition of Fundtech which were recorded in the first quarter of These decreases were partially offset by the tax impacts related to net foreign exchange gains and losses. Net income and Net income per share Consolidated net income for the first quarter of 2016 of $4.8 million compared to the prior period net income of $34.0 million, a decrease of $29.2 million or 85.9%, primarily due to an increase in amortization of intangible assets of $31.4 million and an increase in finance expense of $12.0 million as discussed above. The increase was partially offset by an income tax recovery of $15.7 million in the first quarter of 2016 as compared to an income tax expense of $3.1 million in the first quarter of Net income per share, basic and diluted of $0.04 in the first quarter of 2016 declined from $0.39 per share in the first quarter of 2015 reflecting a decrease in net income, a higher share count due to the issuance of shares in 2015 contributing to the funding of our Fundtech acquisition, and to a lesser degree, the shares issued in our dividend reinvestment plan ( DRIP ) introduced in the first quarter of Weighted average common shares outstanding in the first quarter 2016 and 2015 were million and 86.4 million shares, respectively. Adjusted net income and Adjusted net income per share Adjusted net income for the first quarter of 2016 was $45.4 million compared to $47.4 million in the comparable period in the prior period, reflecting a decrease of $1.9 million, or 4.1%. Adjusted net income per share of $0.43 was lower by $0.12 per share primarily as a result of higher shares outstanding as noted above and the decrease in Adjusted net income of $1.9 million. A reconciliation to Adjusted net income and Adjusted net income per share from Net income and Net income per share, respectively, can be found in section 10.1 of this MD&A. D+H Q

10 5 BUSINESS SEGMENT FINANCIAL RESULTS 5.1 Operating results by segment and corporate We report our results based on three operating segments: Global Transaction Banking Solutions ( GTBS ), Lending & Integrated Core ( L&IC ) (referred to as the U.S. segment prior to the second quarter of 2015) and Canada. Certain activities, as described under the definition of Adjusted EBITDA in section 10.1, are recorded as part of Corporate as these items are not part of the core operations of the segments. Foreign exchange impacts Results from our GTBS and L&IC segments are impacted by movements in foreign exchange rates. The GTBS segment results are translated into Canadian dollars from U.S. dollars. A portion of GTBS results are denominated in U.S. dollars, while the remainder is translated to U.S. dollars from Israeli new shekel, Indian rupee, Euro, Swiss franc, British pounds sterling, and other currencies. The L&IC segment results are translated into Canadian dollars from U.S. dollars and other foreign currencies. These segment results are translated into Canadian dollars on a monthly basis using the Bank of Canada s average exchange rates for the month. In order to enhance the comparability of results, our GTBS and L&IC segment results are also presented in U.S. dollars. Certain information related to the GTBS segment is also presented on a constant currency basis for comparability with the first quarter of 2015 currency levels in Israeli new shekel, Indian rupee, Euro, Swiss franc, British pounds sterling, and other currencies. See Section 10.2 for details on foreign exchange rates. Our segment financial results are as follows: (In thousands of Canadian dollars, unless otherwise noted) Three months ended March 31, 2016 GTBS Segment L&IC Segment Canadian Segment Corporate Consolidated Revenues $ 94,190 $ 148,604 $ 169,355 $ - $ 412,149 Expenses 72, , ,572 11, ,900 EBITDA 1 $ 21,702 $ 42,039 $ 39,783 $ (11,275) $ 92,249 EBITDA margin % 28.3% 23.5% % Adjusted revenues 1 $ 95,251 $ 149,581 $ 169,355 $ - $ 414,187 Adjusted EBITDA 1 $ 22,065 $ 41,119 $ 39,783 $ - $ 102,967 Adjusted EBITDA margin % 27.5% 23.5% % (In thousands of Canadian dollars, unless otherwise noted) Three months ended March 31, 2015 GTBS Segment L&IC Segment Canadian Segment Corporate Consolidated Revenues $ - $ 137,746 $ 157,268 $ - $ 295,014 Expenses - 89, ,823 (6,111) 201,045 EBITDA 1 $ - $ 48,413 $ 39,445 $ 6,111 $ 93,969 EBITDA margin % 25.1% % Adjusted revenues 1 $ - $ 139,263 $ 157,268 $ - $ 296,531 Adjusted EBITDA 1 $ - $ 47,525 $ 39,445 $ - $ 86,970 Adjusted EBITDA margin % 25.1% % 1. Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 10.1 for additional information and reconciliation to IFRS measures. D+H Q

11 5.2 Global Transaction Banking Solutions (GTBS) segment Business overview GTBS is a leading provider of financial technology to banks and corporations of all sizes in the Americas, EMEA (Europe, Middle East and Africa), and APAC (Asia Pacific) regions with approximately 1,600 employees and 19 offices worldwide, including development centers in the United States, India, Israel, Switzerland and the United Kingdom. Based on 2015 proforma Adjusted revenues, approximately 50% of GTBS revenues are earned from clients in North America, 39% in EMEA and 11% in APAC. GTBS generates approximately 25% - 30% of its revenues in currencies other than U.S. dollars and therefore will have fluctuations based on the strength of the U.S. dollar. While we did not own GTBS for the period of January 1, 2015 to April 29, 2015, we have calculated the growth in GTBS Adjusted revenues based on proforma measurements for Management uses proforma figures for comparability and assessing trends in the business. Effective April 30, 2015, the operating results from our acquisition of Fundtech are reported as the GTBS segment of D+H. The GTBS segment represented 23% of the first quarter of 2016 consolidated Adjusted revenues. Revenues and Adjusted revenues (In thousands of dollars) Three months ended April 30, 2015 to In Canadian dollars March 31, 2016 December 31, 2015 September 30, 2015 June 30, 2015 Total revenues $ 94,190 $ 89,337 $ 87,864 $ 55,102 Total Adjusted revenues 1 $ 95,251 $ 101,857 $ 90,352 $ 56,568 In U.S. dollars Total revenues US$ 68,990 US$ 66,790 US$ 67,012 US$ 44,845 Total Adjusted revenues 1 US$ 69,762 US$ 75,979 US$ 68,912 US$ 46, Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 10.1 for additional information and reconciliation to IFRS measures. We use Adjusted revenues as a performance measure as it normalizes the impact of applying acquisition accounting. For the Fundtech acquisition, acquired deferred revenues were adjusted to reflect the fair value at the acquisition date in accordance with IFRS (see section 10.1 of this MD&A for full discussion). Adjusted revenues in the first quarter of 2016 were $95.3 million (US$69.8 million) compared to $101.9 million (US$76.0 million) in the fourth quarter of The revenues reflect the normal cycle of business for GTBS which has its highest revenues in the fourth quarter. SaaS and maintenance revenues generated approximately 56.3% of GTBS Adjusted revenues in the first quarter of On a constant currency basis, GTBS proforma Adjusted revenues for the first quarter of 2016 increased by 9.2% compared to the first quarter of Global Payment Technologies (Global Payments and U.S. Payments) proforma Adjusted revenues in constant currency grew 19.1% when comparing the first quarter of 2016 to the prior year period. Expenses (In thousands of dollars) Three months ended April 30, 2015 to In Canadian dollars March 31, 2016 December 31, 2015 September 30, 2015 June 30, 2015 Employee compensation and benefits $ 47,519 $ 43,074 $ 45,724 $ 30,320 Non-compensation direct expenses 1 2,737 2,803 2,372 1,442 Other operating expenses 2 22,232 19,729 20,925 12,112 Total expenses $ 72,488 $ 65,606 $ 69,021 $ 43,874 In U.S. dollars Employee compensation and benefits US$ 34,592 US$ 32,257 US$ 34,881 US$ 24,699 Non-compensation direct expenses 1 1,993 2,098 1,815 1,178 Other operating expenses 2 16,182 14,907 15,987 9,871 Total expenses US$ 52,767 US$ 49,262 US$ 52,683 US$ 35, Non-compensation direct expenses include material, shipping and selling expenses. 2. Other operating expenses include occupancy costs, professional fees, communication costs, repairs and maintenance costs, travel expenses, marketing and promotion expenses, and expenses not included in other categories. Expenses in the GTBS segment are primarily related to the global employee base that develops, sells and delivers software and related professional services to clients along with the related infrastructure costs such as technology, facilities, travel, administrative and business development expenses. Expenses tend to be fairly stable throughout the year, fluctuating based on changes in the professional services team capacity requirements for client deliveries. Since acquisition, these expenses also include costs for risk initiatives and a portion of the costs related to finance, branding and governance from D+H Corporate. Expenses in the first quarter of 2016 increased over the fourth quarter of 2015 by $6.9 million or 10.5%, or 7.1% in U.S. dollars, primarily due to increases in compensation. D+H Q

12 EBITDA and EBITDA margin (In thousands of dollars) Three months ended April 30, 2015 to In Canadian dollars March 31, 2016 December 31, 2015 September 30, 2015 June 30, 2015 EBITDA 1 $ 21,702 $ 23,731 $ 18,843 $ 11,228 EBITDA margin % 26.6% 21.4% 20.4% In U.S. dollars EBITDA 1 US$ 16,223 US$ 17,528 US$ 14,329 US$ 9,097 EBITDA margin % 26.2% 21.4% 20.3% 1. Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 10.1 for additional information and reconciliation to IFRS measures. Adjusted EBITDA and Adjusted EBITDA margin (In thousands of dollars, unless otherwise noted) Three months ended April 30, 2015 to In Canadian dollars March 31, 2016 December 31, 2015 September 30, 2015 June 30, 2015 Adjusted EBITDA 1 $ 22,065 $ 35,574 $ 20,666 $ 12,278 Adjusted EBITDA margin % 34.9% 22.9% 21.7% In U.S. dollars Adjusted EBITDA 1 US$ 16,487 US$ 26,209 US$ 15,721 US$ 9,952 Adjusted EBITDA margin % 34.5% 22.8% 21.6% 1. Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 10.1 for additional information and reconciliation to IFRS measures. For the first quarter of 2016, EBITDA was $21.7 million, and Adjusted EBITDA was $22.1 million. Adjusted EBITDA for GTBS is segment Adjusted revenues less segment expenses. GTBS segment expenses exclude acquisition-related and other charges, including business integration costs and costs related to the Company s initiatives to align global operations and achieve cost synergies following D+H s acquisitions, which are reported by Corporate. 5.3 Lending & Integrated Core (L&IC) segment Business overview We generate revenues from lending and integrated core solutions in the L&IC segment. Lending solutions include solutions that simplify the lending application and origination processes and provide compliance loan documents. The majority of solutions support commercial, consumer and mortgage lending, enabling clients to leverage their technology investments across multiple lines of business. Integrated core solutions include our core banking platform offerings and complementary channel solutions. Integrated core solutions also include optimization solutions which assist our clients in managing technology infrastructure and driving efficiencies. Our L&IC segment comprised 36% of the first quarter of 2016 consolidated Adjusted revenues of the Company. D+H Q

13 Revenues (In thousands of dollars, unless otherwise noted) Three months ended March 31 In Canadian dollars $ Change % Change Lending solutions $ 74,886 $ 74,563 $ % Integrated core solutions 73,718 63,183 10, % Total revenues $ 148,604 $ 137,746 $ 10, % In U.S. dollars Lending solutions US$ 54,636 US$ 60,030 US$ (5,394) (9.0%) Integrated core solutions 53,720 50,908 2, % Total revenues US$ 108,356 US$ 110,938 US$ (2,582) (2.3%) Adjusted revenues (In thousands of dollars, unless otherwise noted) Three months ended March 31 In Canadian dollars $ Change % Change Lending solutions $ 75,705 $ 75,935 $ (230) (0.3%) Integrated core solutions 73,876 63,328 10, % Total Adjusted revenues 1 $ 149,581 $ 139,263 $ 10, % In U.S. dollars Lending solutions US$ 55,232 US$ 61,135 US$ (5,903) (9.7%) Integrated core solutions 53,835 51,025 2, % Total Adjusted revenues 1 US$ 109,067 US$ 112,160 US$ (3,093) (2.8%) 1. Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 10.1 for additional information and reconciliation to IFRS measures. In the first quarter of 2016, L&IC Adjusted revenues increased by $10.3 million or 7.4% from $139.3 million in the first quarter of 2015 to $149.6 million in the first quarter of 2016 however, decreased by 2.8% in U.S. dollars. Lending solutions In the first quarter of 2016, Adjusted revenues from lending solutions decreased by $0.2 million or 0.3% over the prior year, or 9.7% in U.S. dollars. This decrease was primarily due to lower revenues from our LaserPro product due to reduced contractual renewals in the quarter relative to the first quarter of The lower rate of renewals was driven by the lower number of contracts up for renewal in the quarter as renewal cadence is not evenly distributed from year to year. Importantly, we continue to see very high retention rates with respect to LaserPro contract renewals. In 2015 we retained 96% of the clients and 97% of the value for clients renewing in the year. Compounding the low quarter and year in the cycle of renewals is the method of revenue recognition that is followed under IFRS for LaserPro term contracts. A typical 5-year LaserPro term arrangement is a multiple element contract with annual payment terms and is comprised of the software license, non-essential services, and maintenance. Because of our long and successful history of full and timely payment over the term of the contract the extended payment terms do not delay the recognition of revenue. Therefore, where fair value of the undelivered elements exists, license revenue is recognized upon delivery and typically represents approximately 65% of the contract value excluding non-essential services. However, total contract amounts due are billed annually over the contract term and result initially in an increase, then in a reduction in unbilled receivables on the balance sheet. Cash generated from this business will continue to grow in 2016 over 2015 as a result of prior year s renewals and new contracts. The decreases discussed above were partially offset by new customer bookings. Integrated core solutions In the first quarter of 2016, Adjusted revenues from our integrated core solutions increased by $10.5 million or 16.7% from $63.3 million in the first quarter of 2015 to $73.9 million in the first quarter of 2016, or 5.5% in U.S. dollars. This growth was primarily driven from growth in our card payments revenues and growth in channel solutions revenues. For the first quarter of 2016, the increase in our card payments revenues was partially due a reclassification of certain passthrough fees which in the comparative quarter were recorded as a gross reduction of $1.1 million (US$0.9 million) to our Adjusted revenues with an equal and offsetting decrease to our operating expenses. When normalized for this change, Adjusted revenue from our integrated core solutions would increase by $9.5 million or 14.7% versus the prior year, or 3.8% in U.S. dollars. The net impact to EBITDA of the reclassification was nil. D+H Q

14 Expenses (In thousands of dollars, unless otherwise noted) Three months ended March 31 In Canadian dollars $ Change % Change Employee compensation and benefits 1 $ 64,473 $ 58,245 $ 6, % Non-compensation direct expenses 2, 4 16,818 12,485 4, % Other operating expenses 3, 4 25,274 18,603 6, % Total expenses $ 106,565 $ 89,333 $ 17, % In U.S. dollars Employee compensation and benefits 1 US$ 46,908 US$ 46,941 US$ (33) (0.1%) Non-compensation direct expenses 2, 4 12,262 10,058 2, % Other operating expenses 3, 4 18,479 14,946 3, % Total expenses US$ 77,649 US$ 71,945 US$ 5, % 1. Employee compensation and benefits expenses include share-based compensation expenses and costs related to risk, branding, finance and governance at D+H Corporate. These costs are net of amounts capitalized related to software product development. 2. Non-compensation direct expenses include materials, shipping, selling, royalties and third-party direct disbursements. 3. Other operating expenses include occupancy costs, communication costs, professional fees, transaction costs related to acquisition of businesses and expenses not included in other categories. 4. Reimbursable travel expenses are now included as part of non-compensation direct expenses, whereas in the prior period they were reported as other operating expenses. The prior period has also been adjusted to conform to current period presentation. In the first quarter of 2015, these costs were $0.6 million. Employee compensation and benefits Employee compensation and benefits expenses in the first quarter of 2016 increased by $6.2 million or 10.7% primarily due to the stronger U.S. dollar. Employee compensation and benefits expenses in U.S. dollars decreased 0.1% over the first quarter in the prior year. Non-compensation direct expenses Non-compensation direct expenses increased by $4.3 million or 34.7% in the first quarter of 2016 primarily due to the stronger U.S. dollar and $3.3 million in higher third-party royalty payments. The additional increases are the result of growth of recurring revenues in our channel solutions business and revenue growth in our cloud-based solutions business. For the first quarter of 2016, the third-party royalty payments were higher due to a reclassification of certain pass-through fees which were previously recorded as a gross reduction to our revenues with an equal offsetting decrease to our non-compensation direct expenses. We are an agent in the card payment transaction, and this related fee component should be accounted for as a pass through, net on the balance sheet. The net impact of the reclassification to EBITDA and Adjusted EBITDA was nil. The comparative period does not reflect this change to non-compensation direct expenses as it was not significant and totalled $1.1 million (US$0.9 million). When normalized for this change, non-compensation direct expenses would have increased by $3.3 million or 24.1% (12.3% in U.S. dollars). Other operating expenses The increase in other expenses of $6.7 million or 35.9% in the first quarter of 2016 primarily reflected a stronger U.S. dollar, increased telecommunications costs, and consulting fees and other professional fees in support of our risk activities and growth strategy. In addition, we had $2.2 million in customer related costs that are not expected to recur. Other operating expenses also include costs related to finance, branding and governance. EBITDA and EBITDA margin (In thousands of dollars, unless otherwise noted) Three months ended March 31 In Canadian dollars $ Change % Change EBITDA 1 $ 42,039 $ 48,413 $ (6,374) (13.2%) EBITDA margin % 35.1% (6.8%) In U.S. dollars EBITDA 1 US$ 30,707 US$ 38,993 US$ (8,286) (21.2%) EBITDA margin % 35.1% (6.8%) 1. Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 10.1 for additional information and reconciliation to IFRS measures. EBITDA and EBITDA margin for the first quarter of both 2016 and 2015 reflected acquisition accounting adjustments that increased EBITDA by $0.9 million. D+H Q