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SIMON BROWN: I‘m chatting now with Charles Savage, CEO of the Purple Group. Disclaimer upfront – I hold shares in Purple.
Purple’s results out for the six months ending February saw revenue up 6.7%, operating expenses up 57.8%, and ultimately a loss of 85 cents. Charles, I appreciate the time today. Let’s start with those operating expenses. A big jump there. I imagine part of that is the Philippines, part of that is new products. Is the Rise acquisition in there as well?
CHARLES SAVAGE: Yes, all of the acquisitions made last year. We acquired EasyCrypto, EasyProperties and Rise last year, and all of those costs are now consolidated into the group. That’s responsible for roughly half of that increase. And then the other half, as you’ve already noted, is for new regions and new products.
SIMON BROWN: I’m going to come to some of those regions in a moment. Let’s touch on revenue. That was higher, but it is lower per count. You stated in the results that it’s tough out there in the markets. It’s even tougher out there just being a consumer in South Africa. You’re seeing less activity. Are you seeing much [in] withdrawals as well?
CHARLES SAVAGE: No. The withdrawal rate is lower than it was this time last year relative to assets. So people are proving that they’re protecting the assets that they have on platform and they’re being resilient and robust around their kind of long-term investment goals.
But the other side of the coin is that the business is obviously very reliant on new inflows through deposits, and then flow on the platform through investors’ portfolio turnover, and market conditions are against both those things.
The inflation environment is having a massive impact on people’s ability to save and invest…
It doesn’t matter where you look in South Africa – the prevailing economic situation is impacting on businesses like ours.
The second area is that in order for people to confidently invest or change their portfolio, they’ve got to have a high degree of certainty – and with it investor confidence – and in market conditions like this you’ve got incredible uncertainty. So, people would rather just stick with what they’ve got than make changes in their portfolio that they’re not confident in.
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SIMON BROWN: Are you seeing a bias perhaps to more offshore as well? You mentioned South Africa, and it is overly easy to be pessimistic on South Africa. Do you see more going into, for example, the US and like?
CHARLES SAVAGE: We’ve just hit 100 000 accounts in the US, so we’ve got 800 000 active accounts across the platform, and 100 000 of those in the US, and I think that’s under-indexing when I compare our platform to other platforms in South Africa. Other stockbrokers I talk to tend to talk about it sort of being 50:50, and ours isn’t. From an asset base just over 20% of the assets are offshore – nowhere near 50:50. It is increasing at a good rate, but not an alarming rate in the sense that sometimes there’s a big flight to international assets. Maybe what’s stopping that is that the exchange rate is not one you really want to cross as these levels.
So maybe South Africans are being optimistic about the exchange rate, and also investing in what they know and understand. The South African universe is small and much easier to come to grips with. The US universe is massive and it’s a very complex environment.
SIMON BROWN: Yeah. I remember the first time I opened a US platform the number of stocks overwhelmed me, so I searched ETFs and there were over a thousand ETFs. I’ll be honest, I just shut it down. It was too much for my head to comprehend.
Signups? You are still growing. You had 831 000 active accounts, and that’s important; the active there is the important part of that. Signups have slowed, and I suppose that’s the same story. There’s not someone waking up and thinking, oh, I’ve got this extra pile of cash, let me invest it. If anything, someone’s waking up and thinking I’m struggling to make ends meet.
CHARLES SAVAGE: Yes. Let’s just take Covid out of the equation. Pre-Covid we were doing about 12 000 signups a month, and now we’re well past Covid and we’re doing 30 000 signups a month. So, if you just take out and normalise the growth between pre-Covid and post-Covid, I think these are still very good growth numbers in the context of the South African environment. And, Simon, you’ve got some real context here, and you’ve worked at a stockbroker.
Stockbrokers talk about having 10 000 active customers and the big ones talk about having 70 000 active customers. On the low end we add 12 000 active customers a month, so we create a new stockbroker every single month and it takes us at this current run rate about five to six months to replicate the second-biggest stockbroker in South Africa.
These numbers, in the context of South Africa, I still think, are very good. Do we think they can be better? For sure – in a healthier environment where people have got more capacity to save and invest.
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SIMON BROWN: For context, when I joined a stockbroker in 2007, we had 25 000 active accounts, and we were the largest in the country by some way. It was a while ago, but nonetheless some of the things you can control – client acquisition costs, client managing costs. How are those doing in terms of Purple?
CHARLES SAVAGE: I think we’ve done really well. Client acquisition costs have gone up a bit and the simple reason is your marketing money isn’t going to generate the same return in this environment. And so, our decision there is this cutback on marketing money is not getting us the same return, and let’s use other avenues to find customers, our partnerships as an example. So we’re lucky we’ve got that.
But on a cost-to-serve basis, which is a very important lever for us, we’ve consistently brought that number down. And now we’ve still managed to bring it down in a very high inflationary market. We’ve managed to still keep costs trending down at a per-customer level. That is something that we focus on, and we are proud about, because it gives us significant advantage over other businesses that compete with us.
SIMON BROWN: How many staff do you have at Purple these days?
CHARLES SAVAGE: We have 200. Twenty-four of those are in the Philippines and another five or six in other parts of the world. There are 180 here back at home in South Africa.
SIMON BROWN: Again, for context, when I was at a stockbroker, we had 100. Let’s touch on some of the partners. In the Philippines I know you’d hoped to get it out sooner; regulations are seldom as easy as one likes, but that is going to sort of go live mid-year with the trading game, and then, what, kick in sort of late Q3, early Qq4?
CHARLES SAVAGE: Yes, exactly. The trading game obviously doesn’t need regulatory support, because it’s just a game. But we’ve worked with a regulator to understand their concerns and, quite frankly, there isn’t a legal reason for them to stop us from going live, but the regulator has the right to say no for his own reasons other than law. So we really try to understand their principal concerns, and we think we can alleviate them through using a game to give investors comfort with the platform, investing for the first time.
Then post the game we will launch managed products first – so the ability to buy bundles of US stocks on our platform. And then post that we would like to launch DIY Investing for everyone. But that DIY Investing’s probably going to go to next year sometime, and we’ll focus on managed investments first.
SIMON BROWN: And that’ll be for users investing into the US market?
CHARLES SAVAGE: Yes. To start with, we’ll do the US; it’s the US market and all international markets – so UK, Europe, Australia – but with a very strong focus on the US. The Philippines and Filipinos have a very high affinity [with the US] because of their history with the US.
So we’re going to focus on US stocks, and in time we’d love to open up the local market. It’s a very small market with 10 highly liquid shares that are worth investing in. But there’s lots to be done there. It’s a huge market with huge opportunities to grow if they create an access point that is just much easier for people to buy the shares, their local shares.
SIMON BROWN: I take the point on that. Your partners [are] Capitec, Discovery, Telkom. Certainly, Capitec is ticking on nicely, Discovery with smaller numbers, but higher net value, and Discovery Bank just smaller. Are you happy with how the partnerships are faring?
CHARLES SAVAGE: Yes, very happy with them. I think our focus really has been getting the partnerships in place. That’s shifting now to saying, look guys, we really don’t need new partnerships, especially here in South Africa. Obviously internationally we’ll take them. But locally what we need to do is focus on the partnerships we’ve got and improve the processes and projects and marketing initiatives around onboarding customers.
Our real focus has been getting the tech in place and the legal agreements and building relationships.
Now we need to sweat those relationships and deliver higher-value customers. I think the benefit of having those relationships in place is that we’ve got the right to go and seek out those customers now.
SIMON BROWN: GT247, your derivative arm – I have to say I thought those numbers held up surprisingly well considering the tough environment, considering markets [where] well, we’ve seen some movement over the period, but holding nicely from something that has become at points very volatile. Is there a chance that maybe the volatility subsides there, or is that a long wish?
CHARLES SAVAGE: I’ll tell you, there’s one business I’m not going to try and protect, and that’s GT247. If I could I’d probably be able to predict the future of all markets, in which case I’d be better off just investing than running a business. But yes, it did play well. It did work really well in the first quarter. The second quarter was less impressive, and current trading conditions are quite muted. So let’s see how things pan out in the year.
SIMON BROWN: Fair point. Our last question – New products coming… Of course, products that have come more recently are EasyCrypto, EasyProperty; both have nice places/bases in place there. You’re also going to be bringing lending products, you’re going to be bringing insurance products. Those really are what you have spoken about over the years, where you’ve got the base of clients. Now, it’s finding other products that they can utilise and find useful.
CHARLES SAVAGE: Yes, exactly. We built this business on the lowest-margin product in financial service. To buy shares and pay 25 basis points is a very low margin business – again, as you’ll know. [With] the other products that we bring to market, EasyProperties has a higher margin, and EasyCrypto has a higher margin.
EasyCredit is probably the one I’m the most excited about because, one, we are going to deliver a product that enables a much lower cost of credit than the alternatives.
But two, it also introduces for us a high-margin business. It’ll be multiples of 25 basis points that we’ll be able to make in delivering the product to our customers, and it’s one that serves a very real need. Our customers withdraw only because they’re servicing emergency requirements in their lives.
Typically the insight is that the money comes back to us within 12 months. [We are] providing them with a loan against their own securities, so that they can deal with those emergencies but not disrupt their investment activities. I think that’s a business that’ll disrupt our income statement in time.
SIMON BROWN: I hadn’t even thought of it that way. I always just thought of it as essentially almost a margin product, with a low level of leverage. And of course the key here is that you hold their assets, so you’ve got the collateral – and I imagine you would have multiples of whatever the loan is.
CHARLES SAVAGE: Yes, exactly. Only the top hundred shares will qualify for collateral in South Africa for now. We’ll do international later. We’ll assess them based on the liquidity and diversification of their portfolio, as well as their own credit worthiness to the platform, in terms of how often they pitch up, what their deposit rates are, etc.
So, I really can’t wait to get the product into the market. We’ve taken way too long with it, and that’s a criticism of us, but the opportunity’s not getting smaller. The more customers we’ve got, the more assets we’ve got on platform, the bigger the opportunity is to deliver credit to this customer of ours.
SIMON BROWN: We’ll leave it there. Charles Savage, CEO of Purple Group, I appreciate the time.
