A few weeks ago, Gal Haber floated Plus500 Ltd. (AIM: PLUS) on London’s Alternative Investment Market (AIM), thereby exposing one of Israel's most successful and fascinating Internet companies to public gaze. The IPO of Plus500, which has been in existence for only five years, was a great success. The company, which operates an online platform for trading in contracts for difference (CFDs) in stocks, commodities, indices, foreign currencies, and exchange traded funds (ETFs), raised $25.3 million, and its six founders sold shares for $50.1 million in an offer for sale, which was originally intended to be much smaller, but increased in response to high demand for the company's shares.
Plus500's market cap at the IPO was $202 million, and its reception during the first eight trading days can only be described as hot: the share price rose 11%, boosting the market cap to $225 million. Not a bad start.
"This was quite an amazing experience," Plus500 CEO Gal Haber told "Globes" in an exclusive interview, in which he talked about the IPO and especially about the road show. "For me personally, the road show was not easy, because I had a baby waiting for me at home, and yet, this was a very interesting experience."
Haber, who led the road show with Plus500's largest shareholder, Alon Gonen, who is considered the brains behind the company's technology, says that British investors have become more favorable over the past decade, despite being burned by failed Israeli offerings. "Investors are smarter than before," he says, "We were worried that we would not be welcomed with open arms because we were Israelis, but we were pleasantly surprised."
Haber says that all the six founders waived a post-IPO celebration, and returned to Israel to their families and work routines. "Plus500's IPO was just one stage of many in the company's life cycle. The current objective is to grow and create value for the investors who have given us their trust. I don’t want to be another Israeli failure," he says.
"Globes": Are you worried about becoming part of this unflattering statistic?
Haber: "Not really. I can do nothing about except to do my work."
Plus500's story is the story of six young patriotic and modest men from northern Israel who work hard. Haber says, "We're all crazy geniuses." Commenting on remarks about Gonen by an associate, which appeared in "Globes", Haber says, "He has an IQ at a level beyond anything imaginable."
Gonen (36) and Elad Ben-Yitzhak (39) met Haber in high school in Haifa, where Haber still lives and where Plus500's offices are located. "We played football in the neighborhood," says Haber. After their military service, the three friends went to the Technion Israel Institute of Technology, where Haber earned a B.Sc. in Computer Science, Gonen a B.Sc. in Electrical Engineering, and Ben-Yitzhak an M.Sc. in Electrical Engineering. At the Technion, they met three other students: Shlomi Weizman (34), from the Golan Heights, who earned a B.Sc. in Software Engineering; Omer Elezri (34) from Tiberias, who earned a B.Sc. in Information Systems; and Shimon (Moni) Sofer (38), from Netanya, who earned a B.Sc. in Computer Science.
After their studies, the six men each went their separate ways, but they soon reunited. Haber, who briefly worked at Top Image Systems Ltd. (Nasdaq: TISA; TASE:TISA), linked up with Gonen in 2004 to found Interlogic Ltd., which operated Israel's first a backgammon site. Three years later, they sold all their holdings in the company to other Israeli Internet entrepreneurs, when Gonen first began to think about the idea for Plus500. Play65 Ltd., which operates Interlogic, is still active, and claims to be "the world's largest backgammon community."
Shorting Microsoft
"Alon tried to short Microsoft (Nasdaq: MSFT) shares, and reached the site of IG Group, which is the biggest player in our market," relates Haber. "He concluded that the registration process was too complicated and unfriendly to the user, and we began to think about establishing Plus500."
In 2008, Plus500 worked on its first version for the PC, which was launched in 2009. In 2010, the browser version for Mac and Linux users was launched, followed a year later by an iPad and iPhone version, and, in 2012, an Android version. In short, it does not matter which smartphone or tablet you use, Plus500's site is available on it.
In the first quarter of 2013, 40% of all transactions on Plus500 were made via smartphone or tablet, a figure which highlights the slow death of the PC.
When Haber and Gonen began imagining Plus500, they called their four friends from university, and the six established the company. The youngest was just 29 at the time, and the oldest was 34. Haber says that their holdings were divided in a straightforward way. "Alon was the only one to invest his own money in the company - $400,000. Shimon, Elad, and I worked for a year without pay, and Shlomi and Omer received low salaries. As a result, Alon received the biggest bloc of shares (39.7% before the IPO), Shimon, Elad, and I received 14.1% each, and Shlomi and Omer each received 8.6%."
So only $400,000 was invested in a company that has a value of almost $250 million?
"Yes. That's it."
This figure best highlights the wealth gained by Plus500's six founders, long before the company was floated. Between the founding and the IPO, it distributed $41.8 million in dividends, which means that the wealth of each of the six men, as calculated by "Globes", comprises dividends, shares sold as part of the offering, and the paper value of their residual holdings.
Alon avoids the media like the plague. What can you tell us about him?
"We've been friends for many years, and I can say that we complement each other well, otherwise we would not have been able to work together for such a long time. Alon always has lots of ideas, while I am more down to earth, more practical. Alon always responds very fast, and I operate the filter when necessary. We work very well together."
So he is more the entrepreneur and strategist, and you are more the manager.
"Exactly."
Quintessentially Israeli
At this point, and apparently in response to rising public criticism of Israeli corporations that receive huge tax breaks, it is very important for Haber to state that Plus500 is an Israeli company in every respect, and that it pays almost all of its taxes in Israel.
"Plus500 is structured so that the parent company is Israeli, incorporated in Israel, and has two subsidiaries. One is British, with a British operating license; and the other is Australian, with an Australian operating license. The profits of both companies flow to the parent company, which means that most of Plus500's tax is paid in Israel. We're not like Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA); we get no tax breaks," says Haber. "Furthermore, we hold our shares through Israeli companies, not like others who have companies incorporated in tax shelters."
According to Plus500's documents, each of the six founders holds their shares directly or through an Israeli incorporated private company which they own. "Yes, it's pure patriotism," says Haber. "This is important for us, and it is even reflected in our reserve military duty. Plus500 is a very good company for the Israeli economy."
But it is still a company with only 40 employees in Israel.
"Our small number of employees is because of the company's high automation. Almost every aspect of the company is automated, from the back office systems to the online marketing systems, which render the need for sales staff unnecessary."
Haber acknowledges that the screening process of any R&D candidate or programmer seeking a job at the company is meticulous. "It is very important for us that every programmer is a genius, worth at least 20 average programmers. We can take 8-10 months to find such a person."
Do you seek the best programmer to save on salary costs?
"Yes, but it's not just that. It's important for us to save on personnel costs, so we can invest more in sales and marketing - the most important activities for the company's future."
Plus500's financial report states that its biggest operating expense is sales and marketing, which accounted for 52% of revenue in 2012. The company, like all Internet companies, advertises itself on search engines such as Google, social networks like Facebook, via affiliates (website operators which sell products of companies like Plus500), and even on traditional marketing channels, such as billboards and television.
In 2012, Plus500 invested $28.9 million in sales and marketing. Haber says that this investment is growing, and resembles the spending by competitor IG Group, which spent $50 million in its fiscal year that ended in May 2013. Haber says that Plus500 will spend $35-40 million, no small sum for a company of its size.
Plus500 raised $23.5 million in its IPO, even though it is not pressed for cash and its liquidity allows it to distribute at least half of its profits as dividends. Haber says that the IPO will not push him to acquire similar companies. "M&As are irrelevant in our case," he says. "If and when we buy something, it will be a company that already has a license to operate a site, in Asia, for example, in which case we'll basically acquire only the license, not the current activity. In that case, the investment will be negligible. The IPO was important for us so that every customer could read our financial statements, and we'll be more transparent. We'll have better customers this way."
You expect the average customer to open Plus500's financial statement and thoroughly read its balance sheet before opening an account with you?
"Yes, especially if he invests more than $100,000. He will want assurance that he's depositing his money in a company that can repay him."
According to Plus500's prospectus, the average subscriber is active for 15 months, and generates an average of $1,700 a month for the company during this period. Most subscribers are day traders (opening and closing a position on the same business day).
Plus500 says in the prospectus that its high liquidity allows it to distribute at least half of its profits as dividends. This means that its dividend yield was 7.3% on the basis of 2012, 5.2% on the basis of 2013, and 6.2% on the basis of 2014 (at a company value of $200 million), according to a study by Liberum Capital, the investment bank that floated the company. "We'll continue to distribute dividends aggressively," says Haber categorically.
The dividends are what made Haber and his partners into millionaires before the company's IPO. Haber's share of the dividends to date is $5.9 million, he sold shares for $7.1 million as part of the IPO, and is remaining stake is worth $19.7 million. His total (gross, pretax) capital is $32.7 million.
How does it feel to be a millionaire before 40?
"It may be a cliché, but I'm married to a smart and beautiful woman, I have an amazing son, a little angel, and I'm healthy. So I've been a millionaire for a while, no?," says Haber in reflection.
Nonetheless, hasn’t your world view changed? Hasn’t your attitude toward materialism changed?
"No. In general, I became a wealthy man gradually. It's not like I won the lottery. You know, until last year, I drove a 2006 Mazda 3."
And now?
"A Nissan Juke."
The goal: Turn Plus500 into a global brand
CFDs are not well known in Israel, at least not like in the UK. "In London, there are a lot of ads for CFD sites on the Underground, and no one here knows what it is," says Haber to explain Plus500's choice of the British capital market. The company operates a CFD site for almost every asset on the capital market, from shares to commodities.
The "difference" in contracts for difference is the difference between the bidding price of an asset and the asking price. Plus500, like its competitors, sets the quotes for the bid and ask prices, on the basis of market quotes. The difference between the market quotes and the company's quotes is the basis for its success, and the source of most of its revenue. 70% of the company's revenue is the commission (averaging 0.2%) it collects on the spread between the bid and ask price. 20% of revenue comes from premium products (mainly interest on credit that the company extends its customers), and 10% is created when the market performance goes against a customer's position, in which case his loss in the company's gain.
"In effect, opening an account with us is like opening an investment portfolio at the bank, but the costs are much lower. In contrast to a commercial bank or investment bank, the costs chain, like buy/sell commissions, foreign currency rates commissions, and so on, is much shorter with us," says Haber.
Plus500's site is accessible in 30 languages and available in 51 countries. "Croatia was recently added," says Haber. It is possible to invest via the site in almost 1,800 basic assets, which are chosen by their popularity and level of tradability. "In shares, we usually choose companies worth at least $1 billion," he says.
The biggest player in the global CFD market is Britain's IG Group plc (LSE: IGG), followed by FXCM Inc. (NYSE: FXCM) of the US. IG Group has a market cap of $3.3 billion, and FXCM has a market cap of $628 million. There is a private company that also operates in the British market, Plus500's main market, CMC Markets Ltd..
Haber admits that IG Group is a model for emulation, but makes it clear that Plus500 does not intend to base itself solely as a CFD player. "It's a nice concept, but our objective is to create a user-friendly trading environment and turn Plus500 into a global brand," he says.
Although Britain is Plus500's main market, it accounts for a tenth of the company's revenue. "Our advantage is that we're spread over many countries, so the risk for an investor in us is small," says Haber. He says that this risk was the focus of investors' attention during the road show. "Their main concern, and ours, is unsupportive regulation or the lack of regulation."
Haber says that, even without a foothold in new countries, Plus500 "still has many opportunities to grow in its current markets."
Naschitz Brandes & Co. benefits
"Wonderful people," says Haber warmly about Naschitz Brandes & Co., Plus500's attorney from the beginning and the advisor for its IPO.
Plus500 is the second Israeli company to float on the AIM, after a break of two and a half years, and the first Israeli Internet company to go public there in eight years. "We wanted to break the stigma in the British capital market about Israeli companies," say Naschitz Brandes partners Arnon Samburski and Tuvia Geffen. "And it happened. The capital market is again willing to accept Israeli companies. The stigma is history." They add that they were more skeptical than Plus500 about its Israeli identity.
Naschitz Brandes is more than Plus500's law firm. The firm generally receives shares in the companies it represents, especially in high-tech companies with a high growth profile, and it sell the shares as part of an IPO. The firm did this with Check Point Software Technologies Ltd. (Nasdaq: CHKP), say Samburski and Geffen. In the cast of Plus500, the firm received 0.93% of its share capital (before the IPO), and sold shares for $481,000 as part of the offering. The firm still owns 0.6% of the shares, worth $1.4 million.
Published by Globes [online], Israel business news - www.globes-online.com - on August 18, 2013
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