DH Corporation's (DHIFF) CEO Gerrard Schmid on Q2 2016 Results - Earnings Call Transcript

| About: DH Corp. (DHIFF)

DH Corporation (OTC:DHIFF) Q2 2016 Earnings Conference Call July 27, 2016 10:00 AM ET


Richard Colgan - IR

Gerrard Schmid - CEO

Karen Weaver - CFO


Dylan Steuart - Industrial Alliance Securities

Geoff Kwan - RBC Capital Markets

Stephanie Price - CIBC

Graham Ryding - TD Securities


Welcome to the DH Corporation Conference Call for the Second Quarter Ended June 30, 2016. I would like to remind everyone that this conference call is being recorded today July 27, 2016 at 10:00 AM Eastern Time. I will now turn the call over to Richard Colgan, DH Investor Relations. Please go ahead, Mr. Colgan.

Richard Colgan

Good morning and thank you for attending. Today’s call is hosted by Gerrard Schmid, Chief Executive Officer of DH; and Karen Weaver, Chief Financial Officer. Before we begin, I'd like to advise you that the statements that follow include forward-looking information within the meaning of applicable securities laws. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the business or developments in DH's industry to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements.

Information about the factors that could cause actual results to differ materially from anticipated results or performance can be found in our MD&A, which is available on SEDAR and in the press release announcing the results of the second quarter. As a reminder, we will use several non-IFRS measures and key performance indicators in our presentation, including adjusted revenues, pro forma adjusted revenues, EBITDA, adjusted EBITDA, adjusted net income, adjusted net income per share, adjusted net cash from operating activities and debt to EBITDA ratio among others. These terms are described within our MD&A, where you will also see reconciliations to their nearest IFRS measure.

To accompany our comments today, we have posted a slide presentation on the Investor Relations section of the DH website at dh.com under Events & Presentations and via a link on the earnings press release.

I will now turn the call over to Gerrard.

Gerrard Schmid

Good morning everyone. Let on a personal note, I would like to thank Richard Colgan for his dedication and service to the company and our shareholders during his time with the company. Richard is now retired and will turn over the reins of investor relations to Anthony Gerstein who has joined us as Head, Investor Relations, welcome Anthony.

Moving on now to our results. Our results for the second quarter showed continued positive performance overall. Second quarter adjusted revenues grew by 13% driven by the addition of GTBS, positive FX impact from our U.S. based revenues and solid organic growth in our integrated core and Canadian businesses. Our U.S. lending business performed in-line with our expectations for the second quarter given the timing of LaserPro renewals which we discussed last quarter. Our adjusted EBITDA grew 6% primarily due to inclusion of GTBS, the strengthening U.S. dollar and the savings from our operating realignment.

From a high level perspective let me provide my view of our business, we continue to be encouraged by the stability of the business and our cash generation as well as the strategic positioning of our products. We also continue to be pleased with the progress we're making at evolving our broader capabilities as a global fintech provider. There are three main areas we’ve focused on from an operating perspective over the past several months. Firstly, evolving our operating model and how we organize ourselves. Secondly, ongoing investments in existing and new products as well as optimization of our product portfolio and thirdly ongoing higher investments in risk management related activities.

As noted in our remarks on our outlook in the MD&A we’re somewhat cautious about the potential of a more conservative stance on spending by global financial institutions in light of uncertain macroeconomic conditions. I will have a few more comments on this later. Over the past few months we've been working to reorganize our business to operate on a more global basis. This quarter we reached a major milestone in that journey and are announcing the realignment and initiation of our global operating model which we expect to enhance our go to market capabilities and deliver cost efficiencies. As DH positions itself for growth. We will discuss further details on this call.

Let me now update you on the business in the quarter. Turning to slide 5 and starting with global transaction backing solutions. We continue to be pleased with the performance of our GTBS segment and a positive reception we are receiving from prospective clients for our payment hub technology. Adjusted revenue for GTBS grew by 7% on a pro-forma constant currency basis in the second quarter compared to the same period last year and more than 8% year-to-date. The second quarter results were led by 15% growth in adjusted revenues from our global payment technologies which includes our Global PAYplus payment hub and our U.S. payment technology all on a pro forma constant currency basis.

Year-to-date our growth in these solutions grew almost 18%. We also had several sales successes in the second quarter. First we signed a new contract with a major Southeast Asian financial institution and a major Israel based financial institution for our global cash solutions providing a complete cash management solution for their customers.

Next we signed a contract with a major U.K. based global bank for Global Payments services to enhance their clients' payables receivables processes. Thirdly, the signing of two important contracts one with a major European bank and one with a large Australian financial institution for installations of payments platform as a service in these markets. Unlike historical contracts where we would recognize an upfront license component and professional services revenues, these will provide solid long term volume based revenue streams once implemented, both winning a block chain pilot with a large European bank.

Next a new contract signing with the South African bank for one of our payment solutions. We now serve the majority of the banks in South Africa with our payments technologies and lastly we signed a contract with a large mortgage loan processor in the United States for SAS based wire transfer solution. We are pleased with the level of activity we saw this quarter in GTBS.

While results in Global Payments technologies which includes Global Payments solutions and U.S. payment solutions have been solid with double digit revenue growth on a pro forma constant currency basis, our cash management business which is currently a smaller segment of GTBS has performed below expectations. Here we are working through some product enhancements and project implementation initiatives. We are very pleased with the product and we expect to complete these initiatives in the next few quarters which we believe will position this business for strong growth in 2017 and beyond.

Now let me provide some color on lending and integrated core on slide 6, lending and integrated core results for the quarter compared to the same prior year period were mixed but in-line with our expectations. Adjusted revenue increased by 5% for the quarter but was essentially flat in U.S. dollars compared to the same prior period. Adjusted revenue and integrated core grew by 9% in constant currency for the second quarter compared to the same prior year period. Growth and integrated core was primarily driven by our card payments and channel solutions, as well as from the implementation of Phoenix core banking contracts from our backlog.

We continue to be encouraged by the market demand we're seeing for our hosted Phoenix platform both in the number of course as well as the average contract values being signed. Adjusted revenue in U.S. lending was down by 3% for the second quarter compared to the same prior year period and down 8% on a constant currency basis. The reason for this is primarily the timing of renewals in our LaserPro solution which we discussed at length last quarter.

I will reiterate that the LaserPro proponent is strictly a matter of the renewal timing cycle of LaserPro term license contracts in which 2016 has a lower number of LaserPro renewals than in other years. This will begin to reverse in the back half of 2016 and resume its normal level in 2017. Furthermore, as a reminder this revenue and renewal cycle does not change our cash flows from LaserPro, the cash generated from this product has grown in the mid-single digits annually since the acquisition of HFS and should grow in the mid-single digits in 2016 over 2015 as a result of prior years' bookings growth.

Additionally our competitiveness and clear market leader position in this product area remains unchanged. From a new bookings perspective for LaserPro and other lending solutions we have increased revenues in the second quarter. Over the balance of the year we expect these increased revenues to partially offset the revenue decline from the LaserPro revenue cycle in 2016.

In the quarter we also launched a new commercial origination and processing solution that seamlessly integrates into LaserPro and we are encouraged by early market reaction.

Moving now to our Canadian segment on slide 7, our Canadian segment showed adjusted revenue increases in both lending solutions and payment solutions driving a 6% increase in adjusted revenue for the second quarter compared to the same period in the prior year. Within lending, adjusted revenues increased by 9% relative to the same quarter by last year largely due to the impact of a new contract signed in 2015 with respect to our collateral management solutions offering.

Canadian mortgage technology revenues decreased slightly compared to the prior year period. Due to lower volumes and average order values. Student lending revenues this quarter were slightly higher compared to the same prior year period as a result of increased volumes and professional. Services we have previously noted we will continue to operate under the terms of existing contract which was recently extended until the platform and the technology becomes operational under new contract terms in 2018.

Within payment solutions, adjusted revenues in payment solutions increased by 2% due to the impact of a contract signed in our enhancement services business which substantially came online in Q2 of 2015. This area continues to perform in line with our expectations. As check order volumes decline we continue to offset the financial impact through efficiency improvements, cost reductions and growth from enhancements services. Before moving on to current segments, I will now provide some more detail on a global operating model on slide 8. With two major acquisitions completed over the past three years as well as several others, DH is now truly a global company with broader product solutions and market opportunities.

To better position the business for longer term growth we are continuing to invest in product development and optimizing our product portfolio. While investing in enhanced risk capabilities and as we announced yesterday we are realigning our operations to advance our strategy. We are realigning our GTBS [indiscernible] and Canadian segments to three new segments, global payment solutions, global lending solutions and financial solutions. Our primary goals of this realignment are threefold, first to operate on a global scale in lending and payments. Second, to operate our major functions and business processes globally to benefit from standardization, scale and increased efficiencies. Thirdly, to redirect some of the efficiencies from this program to investments in our products and in optimizing our portfolio. We expect these changes to enhance our go to market capabilities as well to provide us with greater operating efficiencies. We expect to achieve gross savings of approximately $53 million offset by investments in new positions, the expected result in net $25 million in annualized compensation and related cost savings.

Karen will provide more color on the financial impacts and reporting. I will now turn the call over to Karen.

Karen Weaver

Thank you, Gerard good morning everyone. I will start with the GTBS segment on slide 10, it has been a busy quarter in our GTBS segment including crossing the anniversary of the acquisition on April 30th. Q3 will be the first full quarter when we can report on a period over period basis. In the second quarter, this acquisition timing along with organic growth is seen in the adjusted revenues increase of 60% to CAD$91 million from $57 million in the prior year. Adjusted EBITDA was CAD$19.6 million in the second quarter compared to 12.3 million in the prior period reflecting the revenue increases in addition to increased investments in risk related initiatives.

Adjusted EBITDA margin of 22% was consistent with the prior year and in-line with our expectations as we have previously communicated quarterly the GTBS margins can vary in a range of up to 1000 basis points throughout the year. This business is subject to swings in revenue and EBITDA as the revenues from contract can be quite large and fall into various quarters in a year while the expenses are relatively consistent. The segment is also somewhat impacted by the strengthening of the U.S. dollar against other currencies.

Moving now to L&IC segment on slide 11, lending and integrated core, adjusted revenues in the second quarter totaled CAD$147.5 million, on a U.S. dollar basis adjusted revenues were a 150 million consistent with the prior year period. As Gerrard mentioned the positive growth in integrated core was offset by the decrease in our lending business which was primarily due to the renewal cycle of LaserPro in the current year.

Adjusted EBITDA was 46 million in the second quarter compared to 45 million in the prior year period and on a U.S. dollar constant currency basis adjusted EBITDA decreased by $1.2 million, primarily due to the lending revenues in the quarter and increased expenses including the cost of risked initiatives and growth activities and the quarterly timing of certain customer costs. As a result the second quarter adjusted EBITDA margin in L&IC segment decreased to 31% from 32% in the prior year period.

Now turning to our Canadian segment on slide 12. Our Canadian segment had a strong quarter with adjusted revenues increasing 6% to 187 million in the second quarter from 177 million in the prior year period. We saw strength in both lending and payments primarily due to the new contracts from the prior year. While our adjusted EBITDA in the Canadian segment decreased 3% to 51 million from 53 million in the prior year period it was expected due to the onetime revenue item we recorded in 2015 and in addition we recorded an expense catch up in 2016.

As a result we saw the decline in our adjusted EBITDA margin to 27% compared with 30% in the prior quarter. More specifically this is due to favorable non-recurring revenue adjustments in our enhancement services business in Q2 of 2015. In addition in Q2 of 2016 we have recorded a one-time adjustment for non-compensation direct expenses in our mortgage technology business, to a lesser degree the margin decrease also reflects the shifting product mix which is a continuation of a trend in this segment and we expect it will continue.

Turning to slide 13, for consolidated performance in the second quarter. In summary, adjusted revenues totaled $425.3 million as we benefited from the inclusion of the GTBS, FX tailwinds and growth in our Canadian and integrated core segments. Our adjusted revenues were comprised of approximately 43% of SaaS, SaaS like and maintenance revenues. Another 40% of adjusted revenues are derived from transaction processing and product solutions. The balance of our adjusted revenues are comprised of software licenses and implementation related professional services. This is relatively consistent with our business in 2015 though we are seeing some incremental increases in our SaaS, SaaS and maintenance revenue and we expect this to continue over the longer term.

Our consolidated adjusted EBITDA margin was 27% in the quarter compared to 29% in the second quarter of the prior year. Our margins were primarily impacted by the GTBS acquisition, timing and their lower margin, the impact from the LaserPro revenue in L&IC and the reduced margin in Canada as discussed.

Moving on to slide 14, let me just recap the expenses and timing related to our announced realignment. The restructuring expenses are expected to be between 30 million and 32 million. They will be recognized primarily in 2016. Restructuring expenses totaling 22 million have been recorded in the second quarter bringing the year-to-date total to $29 million. The restructuring expenses include severance, consulting and professional fees, financial systems and other realignment cost. During 2016 we estimate we will achieve net savings of $90 million of which 30% has been realized through the end of the second quarter in adjusted EBITDA.

The balance is included in our EBITDA expectation we set for the year. From a financial perspective the restructuring is expected to have a payback in approximately 15 months. While we transition to the new operating model. We will continue to manage and report financial results for GTBS, L&IC and Canada through the end of 2016. We will began reporting under the new business segment commencing in the first quarter of 2017.

Comparative results for the new segment will be provided at the same time for 2016. In addition we will provide a longer history of revenue by quarter.

Moving to slide 15, adjusted net cash from operating activities totaled $80 million which increased by 12% over the prior year period, Importantly year to date the adjusted net cash from operating activities totaled a $146.8 million, an increase of 62.4% over the prior year period. Our adjusted net cash from operating activities which excludes the impact of acquisition related and other charges and the realignment related restructuring expense has primarily been used for capital expenditures, payment of cash dividend and debt repayment.

During the quarter, we continue to invest in our products, platform and infrastructure, capitalizing $23 million this quarter and 44 million year-to-date. We also paid $33 million of cash dividends in the second quarter. We also repaid $10 million of debt in the second quarter bringing the total for the year to $30 million. Turning to slide 16, for more balance sheet highlights. We ended the quarter at a leverage ratio of 2.998 times debt to EBITDA, this is decline from 3.45 one time at the closing of the acquisition in April of 2015 which is due to the growth in cash flow from operations and repayment of $80 million in debt since the acquisition of Fundtech.

Reducing our leverage will allow us to reduce our interest cost based on our contractual terms. We also paid a regular dividend of $0.32 in the quarter and we declared a quarter dividend of $0.32 to be paid on September 30th to shareholders of record on September 16th.

Now moving to the bottom line on slide 17, adjusted net income per share was $0.55 in the quarter on 107 million average outstanding shares which compares to $0.60 in the second quarter of last year on 100 million average outstanding shares. Note that we are just one year into our Fundtech acquisition and while we have accomplished many objectives we expect to continue advancing our financial objectives over the mid and long term.

Let me now hand the call back to Gerrard to focus on the outlook.

Gerrard Schmid

Our current outlook for the GTBS segment revenue is positive but long term growth expected in the high single digits although it may and I stress the word may be slightly tempered in 2016 to mid-single digits. While we continue to see solid demand for our global payment technologies we anticipate some potential for delayed spending by global financial institutions in some markets due to uncertain macroeconomic conditions globally and as financial institutions assess the potential impact of Brexit and other events.

The outlook for our lending and integrated cost segment is for continued revenue growth from our integrated core and channel solutions for the balance of the year. While our lending solutions revenue is more muted in this year on the renewal cycle for LaserPro but we anticipate strengthening in the second half of the year.

In our Canadian business we expect to see our payments and lending growth to moderate to the low single digits in the balance of the year from the mid-single digits as we anniversary two major contracts in the second half of the year. On a consolidated basis our outlook includes an expectation that we will have continued higher expenses in product development as well as risk management rated activities as we further build our capabilities and strength in these areas, both these activities take time and will continue to be a priority as we believe they enhance long term shareholder value.

We expect to invest 100 million to 110 million in capital asset additions comprising both product and infrastructure investment which is running slightly lower than our plan. In addition to the capital investment, we will incur additional expenses related to software development in our operating expenses. Finally we will continue to implement in 2016 the changes in our global operating model to operate more effectively on a global scale. We expect these changes to positively enhance our go to market capabilities as well to provide us with greater operating efficiencies.

Turning now to slide 19 for some closing comments. To conclude we remain committed to our growth strategy and our focus of the near term continues to be firstly to continue to focus on revenue growth including maximizing the growth potential of GTBS and expanding our margins through operating leverage and cost realignment. Secondly, increasing investment in innovation in our technologies as well as building stronger capabilities in software engineering and product development. Thirdly, evolving our business model and capabilities as a global fintech provider operating in a mixed macroeconomic environment.

And fourthly, to continue to reduce operating costs while increasing operating effectiveness through our global operations and fifthly, to continue to introduce and settle our global operating model and finally to enhance our risk management capabilities for the benefit of our clients and the company over the long term.

That now concludes our prepared remarks. And with the operator's assistance we would be delighted to invite your questions. Operator?

Question-and-Answer Session


[Operator Instructions]. Your first question comes from the line of Dylan Steuart with Industrial Alliance Securities. Your line is now open.

Dylan Steuart

Quick question just on the global realignment, you talked a lot about the cost synergies but just maybe on the growth side of things any obvious opportunities for cross selling and markets that maybe some of your products aren't focused on already.

Gerrard Schmid

Part of the strategic logic behind why we've realigned our business is to just create that very, very clear opportunity and while it's early days those sorts of opportunities are part of our medium term growth plans. So as an example we're seeing some early evidence of much tighter collaboration between the Canadian and U.S. markets around our lending technologies where there may be greater opportunities on both sides of the border but I would stress that those are more part of our medium term plans than our immediate growth outlook.

Additionally part of the logically high in this alignment is to set us up over time to be able to look at lending more broadly outside of North America, now that we operate both payments and lending on a global basis we’re better positioned to be able to take advantage of those opportunities. So you're bang on in terms of the sentiment behind why we've gone down this path.

Dylan Steuart

And maybe just a bit more color on the integrated core the growth -- the organic growth very strong this quarter, just wondering if you feel you're hitting a bit of a tipping point just with realizing the strong backlog you have in that segment.

Gerrard Schmid

I will start to go back to the underlying fundamentals within the U.S. core banking market Dylan, I think that this is a market that evolves and turns over a relatively slowly. We've been pleased with the progress of Phoenix in that market. So I don't know that I would say that we're hitting a tipping point, I think we are in an environment where we had a particularly strong quarter and as I commented in my prepared remarks as we look out over the next while we will continue to benefit from strong performance in our channels, in our payments areas related to the core but you know I'm not sure we're hitting a tipping point. I think somewhere in the mid-single digits is still part of how we would think about our expectations in that area.


And your next question comes from the line of Geoff Kwan with RBC Capital Markets. Your line is now open.

Geoff Kwan

Just had one kind of question and follow up to that, just looking at the EBITDA margin at the lending and integrated core, it was roughly about 37% in 2015, so far year-to-date it's 31% and I'm thinking it's largely probably driven by seasonality just being weak on the first half of the year as well as the LaserPro issue, but just wanted to get some color on that in other words, as we’re looking into the second half of this year. Should we try to see a big lift and then the second question is when you think about maybe as a normal year on LaserPro renewals how do you think about how that annual EBITDA margin looks like for the L&IC.

Karen Weaver

Let me provide some comments to your question. Yes we did have a very strong 2015 margin at 37% and definitely this is impacted by the LaserPro renewal cycle. So in 2016 we do expect to have perhaps a slightly lower margin in the year and you’ve seen that year-to-date so far, you know however it will depend ultimately on how the year ends with our revenues in this business. So in terms of seasonality yes because we have talked about the fourth quarter lending in integrated core being such an important quarter in terms of contract inclusion and bookings and that is why the fourth quarter is always so seasonally strong in this business and as I’ve said it will be somewhat muted in the fourth quarter of this year but it will also depend on how our bookings continue to unfold for the balance of the year.

Gerrard Schmid

Geoff, if I can add to that I think that when one thinks about that business on a normalized basis I think 2015 was broadly indicative of the margins we would expect to see in our lending and integrated core business on a normalized basis and as Karen said given how we said that we expect the second half of the year to strengthen within lending, our view is that we'll be looking to exit the year with margins much more broadly in-line with where 2015 was.

Geoff Kwan

Okay. So you’re looking at the margins in -- this year and being like another second half margins for this year would look like in 2015 full year or the full year 2016 will look like 2015 full year?

Gerrard Schmid

No, we exit the year with the Q4s margin looking much closer to Q4 of 2015 so that we will start to build momentum back towards where the margin would normally be on a normalized basis.


Your next question comes from the line of Stephanie Price with CIBC. Your line is now open.

Stephanie Price

Gerrard, can you talk a bit more about the outlook for the GTBS segment, it sounds like the payments hub is expected to see somerelatively strong growth to maybe offset by cash management, can you just talk a bit about the puts and takes here?

Gerrard Schmid

Sure. So let me just with one or two comments about Q2. I mentioned in the quarter that part of our sales activity included the signing of a large European and a large Australian contract for a payments as a service proposition. Had we signed those contracts historically under a license model with professional services you would have seen even stronger results in the quarter. So what we are doing is start to see some evidence of clients looking to trade off an upfront license revenue for a much more longer term revenue tail to us. We think that’s attractive over the time but I think I would just make that comment if you are thinking about how to think about Q2.

We are continuing to see strong demand for our payment capabilities. You know when I talked about the uncertain macroeconomic environment. You know quite frankly we think there is mixed customer sentiment out there as relates to global banks, some banks are accelerating their decisions around payment hubs to realize, cost savings others are slowing down some of their implementations or slowing down their decisions to buy a payment hub and really is very, very mixed which is why we felt it important just to say you know while the competitiveness of the product remains very, very strong and we see a lots of activity the uncertain environment gives us pause to say that there maybe a little bit more volatility on the timing of when deals get signed.

So I think that’s a more important sematic view of how we think about that business, My comments around cash management or more point in time comments we are very pleased with the product capabilities itself from a feature function and technology perspective. There are a couple of operational matters that we are working through over the next couple of quarters but we anticipate that to translate into stronger growth in that area to through the 2017.

Stephanie Price

And then on the payments platform as a service, can you talk a bit about the economics for you versus the traditional license sale here?

Gerrard Schmid

Sure. The first thing that I would say is clearly under a historical licensing model for a large bank we would be recognizing an upfront license anywhere between $5 million to $10 million with healthy maintenance stream that's a certain percentage of that thereafter, what we are seeing under this model is one where once platform goes live will benefit from transaction fees for all payments that flow through that platform over a much longer timeframe too. So we benefit from increased volume expansion in each of those banks environments as payments become more -- as payment volumes grow. So we think it's a healthy trade-off for us because it allows us to benefit from volume growth over time, but clearly over the short term we benefit from -- we suffer from lower license revenues but we think it's a worthwhile trade.

Stephanie Price

Okay, great. And maybe one for Karen on leverage, can you talk a bit about how you’re thinking of leverage towards year-end, it seems like it was relatively flat sequentially?

Karen Weaver

It was relatively flat sequentially. We're focused more on moving down to the two 2.5 range sometime in 2017, so it will -- you know be somewhere between the 3.0 and I will say the 2.75 range between now and year-end.


Your next question comes from Graham Ryding of TD Securities. Your line is now open.

Graham Ryding

Post the Fundtech acquisition you indicated that you thought you could get GTBS up to 30% margins that you're targeting for your overall firm. Should we be thinking of the strategic reorg that serves in 25 million net savings. Is this incremental to the GTBS margin expansion you are already baking in or was it that part of the original process?

Gerrard Schmid

So Graham, it's not incremental to how you would think about the business, it's embedded in our outlook. When I think about the margins for GTBS I mentioned in my prepared remarks that we have -- we are making some higher product investments within GTBS because we are really quite encouraged by the long term growth prospects of the business. So we might actually see ourselves modestly sliding out the timing of the realization of those 30% margins because we think it's healthier for the long term growth for us to be investing more aggressively in the product and I also mentioned that we're making some higher level of investments in risk management, so you know we will be certainly on that path towards 30 it might slide out a little bit but we think that's commensurate with the growth that we're seeing in the demand for payment hubs.

Graham Ryding

And then if I'm just thinking overall you've got a medium term target of 30% margins and now you’re targeting these 25 million in cost savings but you also made some comments that you just spoke to around GTBS margins being impacted by these investments around risk and whatnot and then also lower margins in Canada this year versus last year. So when I bake all that in like is this 30% target still there or has it been increased with this $25 million in cost savings?

Karen Weaver

The 30% target is still there and I always say it's plus or minus 200 basis points, might be that it hasn’t changed.

Graham Ryding

Plus or minus 200 basis points, okay, so there's quite a bit of breathing room there. And then on the payment hub side, your guidance around mid-single digit for this year, are you just be cautious there? Are you actually seen your pipeline slow down somewhat with these macro concerns that you’ve been referencing?

Gerrard Schmid

Graham, we are being cautious and as I said in answer to one of the earlier questions. We are dealing with an environment with very mixed customer sentiment, so while we continue to see high demand, the timing with which customers are making their individual buying decisions it's becoming more volatile where some decisions are sliding out, some decisions are being made to slow down, some implementation cycles. So the combination of that just adds more volatility to how we look at to the GTBS segment but I would not characterize our comments as us creating any clarity or any perspective that there is a slowdown in appetite that’s not the expectation, it's just a more mixed customer landscape that we’re dealing with now.

Graham Ryding

And then the payment as a service model is that -- is it a small percentage of your clients that are on that, like is it relatively new model that you're offering your clients.

Gerrard Schmid

It is new the -- this quarter we signed two clients to that model. So it's early days in terms of whether we will become trained or not, we’re seeing a growing number of larger institutions expressed some interest at looking to participate with suppliers like DH to participate in volume expansion. So we're watching it, we do have some other situations in our sales pipeline that have got similar characteristics but it's still a small part of our sales activities.


Your next question comes from Paul [indiscernible] with Credit Suisse Your line is now open.

Unidentified Analyst

So I think you mentioned new loan origination products and I wanted to know is that different from the mortgage product that you already have, it's fairly new product that you launched in the market and can you just talk about, I mean it sounds like you are not expecting any contribution from that just given the softness still in the lending business for the rest of the year. So I'm wondering how significant you expect that to be over time?

Gerrard Schmid

So Paul, that product is not a substitution or replication around mortgage part, as you're well mortgage part focuses on the mortgage vertical. The product that we launch this quarter is a commercial lending origination in processing product that’s targeting commercial lending rather than mortgages. It's targeting community banks and credit unions, so at this juncture it's still early days. As I’ve said we have seen some positive early momentum in terms of receptivity but I wouldn't take that into any expectations you’ve around enhanced growth.

As I said the biggest driver around our lending performance in the U.S. in 2016 is the cycle of LaserPro renewals and then in addition we try to overcome some of that with some of these organic new product releases but it's early days on that front.

Unidentified Analyst

And then I think in your filing you talked about revenues in L&IC being down, I just wanted to clarify did you mean they would be down versus 2015 on a constant currency basis or you just mean the growth is going to be lower just to clarify that?

Karen Weaver

Well the growth will certainly be lower in terms of the [Technical Difficulty] on a constant currency basis relatively flat again with the -- or the renewal cycle matter being somewhat offset by growth in some of the other lending product that Gerrard just spoke about.

Unidentified Analyst

And then on the -- you previously said mid to high single digit is kind of your long term growth targets, by 2016 in the 4% to 6% range. Is that still the way you are thinking about the year, any changes there?

Karen Weaver

We have no update on that range.

Unidentified Analyst

Okay. So that still the range we should assume then?

Karen Weaver

That’s correct.


As there are no further questions I will turn it back over to you Mr. Schmid.

Gerrard Schmid

Thank you very much, that now completes our call. So thank you for participating today. We look forward to reporting our third quarter results and hosting our next call in late October. Thank you all.


And this concludes today's conference. You may now disconnect.

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