Cinnober has built its reputation in the industry as a pioneer and an opportunistic company that looks for new ways to address market needs. So in many ways it was not surprising the firm hired Peter Lenardos as its new CFO two weeks ago. With his background in investment research at Royal Bank of Canada and elsewhere, he has watched the industry from a specific lens that focuses on the financial condition of a company, as well as its strategic positioning. When he got the call from Cinnober’s CEO Veronica Augustsson, he was ready to bring a different approach to the CFO role at Cinnober, which is well known for its trading and clearing house technology, used by numerous exchanges worldwide.
But as exchanges continue to consolidate, the company has been gradually shifted from that single track into complementary sectors such as trade reporting with its Simplitium group, trade surveillance with Irisium – 60 percent of which was sold last month to KRM22 – and its latest foray into the competitive space of back-office post-trade processing for clearing member firms, long dominated by FIS and ION.
All of this comes at a price, however, and Cinnober has posted quarterly losses over the past five consecutive quarters. In Q1, the publicly traded company reported sales of SEK 85.1 million and a net loss of SEK 37.2 million for the quarter. Despite this, Lenardos said Cinnober will return to profitability in 2019 and it can self-fund its growth across multiple business lines in the coming months. In a wide-ranging interview with JLN’s Jim Kharouf, Lenardos talks about how Cinnober can and will turn it around.
Q: After years in the banking sector in investment research, what drew you to Cinnober?
A: It was two things – the challenge and the chance to go over to the corporate side. It’s an industry that I have followed for quite a while, nearly a decade. And it is a company that is widely respected for its technology.
Also, sell-side research is changing as a result of MiFID II and those changes in my mind are entirely negative. It’s hard to see any positives whatsoever from MiFID II with the regards to sell-side research, commission payment and placement of that sell-side research. So I took that regulatory chance to take a position I long coveted, CFO, for a company I have long admired.
But at the same time, and this may sound a little cheeky, I didn’t want to come into a company that didn’t need my services. I didn’t want a 9-to-5 job. I wanted to roll up my sleeves, get dirty and help make change.
Q: From a CFO’s seat, what will be the keys for Cinnober’s growth?
A: There is one task I have and three lines to our growth. The one task is to lead a path back to profitability – period. We’ll accomplish this in three ways: right-size the cost base, reinvigorating our sales efforts and continuing our diversification and expansion efforts. And those efforts mean expanding our customer base through new products based on surveillance, transparency, risk management and clearing into customer segments such as asset managers, pension funds, banks and brokers. At the same time, we’ll maintain what we are best known for with best-in-class technology for trading firms and clearing houses.
Q: Cinnober has diversified its product base in recent years – moving beyond its core product lines. Looking at the product base and expanding it, how do you do that and manage the cost-base?
A: Because of accounting rules in Sweden, the P&L would look very different if we were capitalizing a lot of these investment costs. You are correct that we have expanded not only our product base but our customer base as well. Taking our clearing technology to clearinghouses and exchanges around the world are very lumpy transactions – very big ticket. Some years you may get none and some years you may get multiple deals. What we’re doing is taking that technology we are known for and expanding it to more customers with smaller ticket transactions to smooth our earnings growth out. So in years where we’re not securing as many technology deals as we’d like, we are still driving top line growth.
There is investment as part of this. We are investing in Patrick Tessier’s team at Minium, which is expected to go live in early 2019 with our first client, Marex Spectron, for realtime post-trade clearing solutions for banks and brokers
On the market surveillance side, which is a very hot market now, we have the Irisium business. We sold 60 percent of that to Keith Todd and his KRM22 firm. He is going to take that to the next level and we’ll continue to remain a 40 percent shareholder there. We will to move to our new cloud-based solution there in September this year. So there are a lot of near-term things I can point to that leave me optimistic about the future of the company.
So how do we do that? We’ve invested. 2017 was clearly a year of investment and new client development. 2018 is a year of new product delivery and launches, but also some restructuring. And 2019 is going to be all about our return to profitability, the growth of the top-line and harvesting and selling those new products.
There was nothing wrong about our core business products and in fact there is everything right about them. The only thing wrong was the market dynamics of that. We had very long sales processes and very long lead times and very infrequent transactions with a very limited customer base. So the goal is to take the programming, development and technology that we’re renowned for and expand it to areas of the market like client clearing, risk management, market surveillance and transparency. Those may be smaller ticket items but a lot more frequent.
Q: Is that easier said than done for a company like Cinnober?
A: Look, we’ve made a lot of investments here. And now we need to prove to the market that we’re getting this right. Minium is a multi-year investment and we’re still investing. We have our first pilot customer we’re about to go live in early 2019. With Irisium, we bought Ancoa in May 2017. That new product will be launched in late Q3 and early Q4 of this year. With KRM22 taking 60 percent of that, that was an endorsement of what we’re doing. A lot of these milestones are not, “Trust me, I’ll get back to you in a few years.” We’re months or quarters away from delivery.
There is shareholder money being spent. Based on the meetings I’ve had with everyone here, we’re going to deliver.
Q: As you look at the post-trade landscape, how does it look to you?
A: It’s exciting and confusing at the same time. Post-trade services is a hot area right now because of the regulation that mandates central clearing. I think that mandate is going to expand to include more over-the-counter trades. For a post-trade clearing technology firm like Cinnober, that is exciting. But for banks and brokers, that also means collateral demands are going to increase. The back office technology at those firms is mostly dated and is in need of further investment.
I say confusing and terrifying to some who will endure an adverse impact from these rules that mandate clearing of OTC products. Trading activities are still grabbing all the headlines, but pre-trade – and that’s data, benchmarks and information and indices – and post-trade – that is clearing, custody and risk management – are where all the action is at.
So you can see that exchange groups are rightly diversifying into pre-trade. Other providers are attacking the post-trade angle because that is where the regulatory mandates are coming. That is exciting for us but if I’m a large clearer, I could see how the confusion over where the regulations are going and terrified as well that the collateral requirements are increasing, and that their technology may not be able to handle some of these requirements. That’s why we’re developing solutions like Minium, with real time clearing technology to help firms in this transition.
Q: MiFID II is now in place. Are you saying firms are not ready for all of the requirements of it?
A: MIFID II is mostly in place. On January 3, 2018 when this became the effective date, regulators delayed some of the provisions until September of this year. That, I think, will benefit our TRADEcho business line with our partner, the London Stock Exchange.
Dodd-Frank was more of a big bang approach. But with MiFID II, a lot of those provisions are going to come in gradually. The EU took a more segmented, two-step approach with MiFID II and EMIR. So we have two different regulations to contend with. If you look at the MiFID II and EMIR central counterparty clearing requirement, that is going to be phased in over time. And if you look at some of the FX rules for OTC trading, they have not said they will make you centrally clear those trades. But there will be a capital hit if you don’t run some of this through central clearing. That is what the regulator seems to be saying, “That’s where we want the OTC markets to go.” To have the vast majority of markets going through central clearing means they want to de-risk the OTC markets and isolate the problems if and when they present themselves.
With MIFID II, some of the provisions are delayed and then you have compliance issues. And EMIR is still being phased in with the regulator still making rumblings that they want more and more OTC trading to go through central clearing.
Q: So you see that there is still more runway to go here in terms of regulation and Cinnober’s technology to address it?
A: These are not my words but something ICE’s Jeff Sprecher said in their Q1 conference call about their trade reporting facility in the UK. Someone asked “Your client numbers are up 600 percent. Does that mean your revenues will rise 600 percent?” He said “No, because the market is not compliant.” He’s the first executive I’ve heard say that we have all these reporting facilities to comply with MiFID II and now we just need the market to comply before we can benefit.
It’s going to get there but we’re waiting for that to occur as well. With the SI 40 regime, (the Systemic internalizer 40 regime) becoming effective in September, that will be another boost to our TRADEcho business line.
Q: What are some of the lessons learned from your prior roles that you will take to Cinnober?
A: A can-do and winning attitude really matter here. I have nothing but respect for our competitors and customers as well. But there are two constants in our industry – regulation and competition. First, instilling that can-do and winning attitude. Two, I am obsessed with numbers, and financial performance is where I think we can improve.
I also learned the power of building long, deep relationships and that’s what helped build a Rolodex of top management and exchange group relationships globally. I also learned that not knowing something is ok – but you need to have the passion to find it.
There are challenges here but I’m loving it – that learning curve of being inside an organization and being an agent for change and improvement. One good thing about being here at Cinnober is that we don’t need to repair our reputation or product. We can work on our communication to be more proactive with all of our stakeholders and customers. We will return to profitability in 2019. That’s what we’re going to do.