Clear Secure Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 9 speakers on the call.

Operator

Morning, and welcome to Clear's Fiscal Third Quarter 2023 Conference Call. We have with us today Karen Seidman Becker, Co Founder, Chairman and Chief Executive Officer and Ken Kornick, Co Founder, President and Chief Financial Officer. As a reminder, before we begin, today's discussion contains forward looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially From these statements are included in the company's reports on file with the SEC, including today's shareholder letter.

Operator

The company disclaims any obligation to update any forward looking statements that may be discussed during this call. During this call, the company will discuss both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP Financial Measures is provided in today's shareholder letter and the most recently filed Annual Report on Form 10 Kew. These items can be found on the Investor Relations section of Clear's website. With that, I'll turn the call over to Karen.

Speaker 1

Good morning. The Q3 reflects our continued ability to drive strong top line growth, Generate high incremental margins and allocate capital. Revenues grew by 38% and bookings grew by 32%, A reflection of Clear's continued strength even as seasonal travel patterns return to pre pandemic norms. 40 percent incremental EBITDA margins in the quarter yielded strong cash flow growth and positive operating margins. We bought Sora ID acquiring important KYC capabilities and a great team.

Speaker 1

In addition, we repurchased 1 1000000 shares since last quarter, increased our quarterly dividend 29% to $0.09 from 0 point 0 $7 and today announced a $0.55 special dividend. As we have said since the beginning, we believe in the end, Growth and Profitability, Investments and Returning Cash to Shareholders. Importantly, our repurchase program actually shrinks our shares of Sanding. In the last two years, our share count is down around 2% excluding pre IPO warrants. We are Excited to be launching a new industry leading identity standard, NextGen Identity.

Speaker 1

With Clear's NextGen Identity, we will be the 1st and only company to operationalize an at scale standardized digital identity. Not only will NextGen Identity set a new Unified Standard, but it enables face as the primary biometric, both on mobile and at the airport. Led by face, We are designing a clear lane experience at the airport, which means you will not have to break stride. In addition, members can soon expect a similar authentication experience Physically and digitally, whether on their phone, in the lane or through a partner's app. We are focused on Innovation and expansion to address the structural growth in travel volumes.

Speaker 1

Travel has been a mess and the onus is on us to continue to drive member experience. One of our key themes is a million more. By 2,030, there will be another 1,000,000 travelers coming through airports every day. NextGen Identity and Lane of the Future will help scale and enhance the member experience. We are also expanding our footprint with added capacity.

Speaker 1

This quarter, we expanded Minneapolis and we'll be adding a new and much needed lane in Atlanta as well as streamlining of existing lanes like we did in Chicago this quarter, expect to see additional lane expansions in the coming quarters. So far this year, we've added 6 of Clear Plus Airports and 7 Reserve Airports, both domestically and internationally. And we expect to finally launch TSA PreCheck enrollment provided by CLEAR this year as we continue to complete key milestones in the soft launch trial period. The Clear Verified platform improves customer experience, increases conversion, reduces fraud and lowers cost for our partners. We are seeing how digital identity is improving online outcomes, which in this moment for both Trust Online And the economy is incredibly important.

Speaker 1

Our LinkedIn partnership continues to build momentum in the U. S. And we have expanded to Canada and Mexico. Recently, LinkedIn added a verification badge to member profiles. In the digital world, this badge is meaningful.

Speaker 1

We acquired SOAR ID this quarter, adding configurable and compliant KYC capabilities to our platform. Not surprisingly, identity matters in financial services, and we're creating a digital fast lane. There is a large unmet need in this industry for lower friction and enhanced security, so the power of SOARAKYC is higher conversion and Lower Fraud for Partners. Growth can sometimes be inefficient and at Clear, we are always measuring investments, returns and outcomes to To ensure we are optimized for both today and the future, we need to maximize agility and innovation while continuing to drive economic efficiency. We completed an organizational streamlining in October by removing layers across engineering, product and certain corporate functions.

Speaker 1

It is important that teams are easily connected top to bottom and cross functionally to ensure connectivity and alignment. Will continue to focus on costs and operational efficiencies to ensure significant revenue flow through to the bottom line. Before I turn it over to Ken to discuss financials, I want to thank our team who is incredibly fired up for the opportunities in front of us and who make it happen every day on behalf of our members.

Speaker 2

Good morning, everyone. We had a strong quarter and I'm excited to take everyone through the numbers. In Q3, we successfully grew our top line while generating meaningful margin expansion. Not only did we report positive operating income, our of Track Year 2 ending on June 30, representing around $133,000,000 of cash outflow. With this large outflow, our free cash flow was negative $9,000,000 Excluding the net outflow this year and last year, our free cash flow was up 150%.

Speaker 2

On a trailing 12 month basis, We generated $180,000,000 of free cash flow, up 97% year over year. Excluding the $10,000,000 net working capital benefit from the partnership, LTM free cash flow was up 150% year over year. After deducting normalized stock comp expense, which is a real economic expense, LTM free cash The acquisition adds a strong founder led team of engineers, great technology and an exciting revenue pipeline in financial services, which we think we can accelerate in 2024 given the integration with our robust platform, go to market resources and brand. The acquisition consists of an upfront cash payment of $5,250,000 of which $3,750,000 was paid in Q3. Further details of the deal terms are available in the 10 Q released this morning, which include retention bonuses and earn outs based on revenue targets.

Speaker 2

Active Clear Plus members were 6,400,000 as of September 30, up 31% year over year. As Karen mentioned, we saw a return to of pre COVID travel patterns this year with a slower end of summer through back to school period and a reacceleration in the back half of September into October. This quarter's net adds carried higher ARPU as we benefited from a mix shift from partner channels and family to full price standard members. Additionally, we saw the positive impact of the year to date price increases we took through both our partner channels and our family channel. Net member retention remains strong at 88.5%, consistent with our long held expectations that retention would settle in the upper 80s.

Speaker 2

As a reminder, this is a member based metric, not a dollar retention metric. It does not reflect the positive impact of price and mix on revenues. Within R and D, there's a $7,700,000 benefit from stock comp reversal related to reorganization related employee departures. On a clean basis, year over year R and D was down 2 40 basis points as a percent of revenue. Most of the R and D savings from the reorganization is already reflected in our Q3 results.

Speaker 2

G and A includes $457,000 of deal expenses related to the SOAR acquisition. Clean G and A was down almost 800 basis points as a percent of revenue year over year. Normalized stock comp expense was $11,800,000 which is down from $14,100,000 last quarter. This excludes pre IPO performance units and reversals. In Q4, of the SORA ID Equity related compensation will bring this number back up a bit.

Speaker 2

We continue to have a sharp focus on stock of compensation expenses. Given where the stock is trading, we've shifted compensation mix towards cash from equity for new hires. Overall, the organizational streamlining efforts will yield approximately $20,000,000 of annual savings, including equity compensation. The Q3 reflects a total of $4,000,000 of benefit, split approximately $3,000,000 in R and D and approximately $1,000,000 in G and A. The $2,500,000 of one time cash severance expense falling $1,500,000 into R and D and $1,000,000 into G and A.

Speaker 2

Additionally, expect R and D to grow sequentially reflecting the SOAR team compensation and near term retention bonuses. The NextGen identity account upgrade will happen over the next few months. Much of the upgrade process occurs on the back end, where we will add to our multi factor authentication enrollment process with data directly from the issuing source. At the airport, members simply need to update their picture as well as confirm their ID. This is an exciting new frontier and the culmination of many years of great work by the Clear team.

Speaker 2

We expect Q4 revenue of $165,000,000 to $167,000,000 and bookings of $185,000,000 to $187,000,000 We've included a modest contribution from PreCheck in our guidance. As we ramp locations and begin marketing, we expect more significant top line contributions in Q1 and 2024. We expect year over year free cash flow growth in Q4. With that, let's go to Q and

Operator

Your first question comes from Sareen Fora of Telsey. Your line is open.

Speaker 3

Great. Thank you guys and great quarter, great outlook. This is Saran for Dana Telsey from Telsey Advisory Group. My first question is on the Next Gen ID. It seems like a big transformation for Clear here.

Speaker 3

Can you help us you did provide some color, but can you help us How the transition will happen over a period of time? Is it like a one and a half year thing, 2 year thing? And then your relationships at the back end as well with the Department of Homeland Security, authentic data sources And how you are making this next gen ID the next ID that we really need from a digital standpoint. Can you help us expand on that one? And then I have one follow-up, please.

Speaker 3

Thank you.

Speaker 1

All right. Thanks for the question. We'll start on the NextGen ID. So you're right. This is a major initiative.

Speaker 1

It will be the highest fidelity digital identity at scale and unlock physical and digital experiences for our members. So this has on both the CLEAR Travel and the CLEAR Verified side. And I think it's a great example of a public private partnership with the Department of Homeland Security Because we've been collaborating with them on these standards since 2020. And so it is pulling data Directly from the source. So the ability to add to our multi factor authentication process with another piece of Deeply Authenticated Data.

Speaker 1

So potentially, for example, from the DMV, is a majorly important initiative. So let's talk about, as Ken said, it's going to happen over the next few months in the airport from an upgrade process. And then from there, you'll see, Lane of the Future, which this is an important part of, be sort of phased in through 2024 And is the really the great unlock for the customer experience to make it that you are not breaking stride And so then also connecting it to a face first experience. And I think when you look at both online and offline, Having a very high fidelity, multi factor authenticated identity is the unlock that people have been looking For again, whether you look at Soarer and Financial Services and connecting KYC to NextGen Identity Or connecting healthcare information to NextGen Identity or being able to use it to have a face 1st connected experience in the lane.

Speaker 2

And just in terms of timing, a lot happens on the back end and so that's going to be in process In the very near future and you'll see member communications going out, talking to our members and explaining the process. It's going to be a very light touch process in the airport, new photos in many cases and confirming of ID's, in other cases. So it's going to be a fairly light touch. It's going to happen in the near future and it's going to be in a compressed timeframe.

Speaker 3

That's great. Can't wait to try it. I feel like we need a secured ID like the next gen one, so great on that one. One quick question on TSA PreCheck. I know it's been long coming, so happy that it's ready to roll out this year.

Speaker 3

Can you help us walk Some of the details that you might have internally prepared for TSA Pre K, like the timing of rollout across airports or If you had a plan like a fee plan or something, can you help us walk out some of those details on TSA PreCheck rollout that's coming up in 4Q?

Speaker 2

So, I'm going to be unfortunately limited on the details. I will say that this is the first time we've included in guidance, so if that gives you some idea of our confidence in the timing of the rollout. So I can't really give you any details on the rollout schedule, but we are Confident that it's a this year event.

Speaker 1

And if I can just add to that, we're incredibly fired up here. We were born to do this, right, to Make enrollment frictionless for consumers to be open at 4:30 or 5 o'clock in the morning at airports With our amazing ambassadors who are there all day ready to help members or travelers, who are still there at 9 or 10 at night. We have 100, if not 1000 of pods at today's 54 airports across the country And more coming. So we are incredibly excited. TSA PreCheck is a great program.

Speaker 1

Millions of travelers are already enjoying it And we're excited to add to our partnership with TSA and help further this program. We were born to do this and we have the infrastructure in place today.

Operator

Your next question comes from Joshua Riley with Needham. Your line is open.

Speaker 4

All right, great. Thanks for taking my questions. Nice job on Execution year in the quarter. You announced the $20,000,000 cost savings. Can you help us understand How much of that savings is related to spend on Clear plus versus investments you've been making on the platform?

Speaker 4

And Maybe give us some color on what guided the decision to make these cuts in terms of the timing?

Speaker 2

Sure. So Josh, this is really about streamlining the organization, removing layers, making decisions faster. Growth can be really Inefficient, as Karen mentioned in her opener. And as owner operators are the onus is on us to really drive the top line, but also ensure that profitability falls to the bottom line. So this is Really across the board, ferreting out inefficiencies, ferreting out bureaucracy, and this is something you can expect us to do on an ongoing basis.

Speaker 2

We are really focused on While Driving Revenue. So this is really more across the board than specific to a business line.

Speaker 4

Got it. And then net member retention is now down to the range that you kind of previously discussed. I guess a few quick questions around retention. What type of visibility do you have now that you've seen the impact of the price changes to retention? And what Cohorts of customers are you seeing a little bit higher churn with?

Speaker 4

Is it SkyMiles or family customers or maybe those who joined post COVID and that are now reassessing maybe help us understand some of the dynamics there. Thank you.

Speaker 2

Sure. Yes, look, this is a really incredible business from a visibility perspective. We have years years of We would wind up coming out of COVID. And so when we look at the retention metric that we report, That is sort of based on a trailing basis on the entire base. When we look cohort by cohort, to your question, gross Tension by cohort has been really stable, right.

Speaker 2

And it's actually higher now than pre COVID levels, even as we've increased price. And this speaks The passion for the brand and the passion for the product. So we've seen a very inelastic demand for Clear. And so we're really happy with where retention is and has been. It's been an upside surprise over the past 6 to And I would also remind you that this metric doesn't actually Give the benefit of the price increases, right?

Speaker 2

This is a member based metric. So this doesn't actually speak to the impact on revenues from the pricing.

Speaker 4

Got it. Thanks guys.

Operator

Your next question comes from Ben Miller with Goldman Sachs. Your line is

Speaker 5

open. Thanks for taking the question. Just on international, you now rolled out a few different offerings internationally like Reserve and the LinkedIn partnership. I'm curious how you think about the broader international opportunity and how some of these offerings in international How markets feed into that around potentially building the brand or relationships with airports and regulators? Thanks.

Speaker 1

So thanks for the question. From an aviation or a travel perspective, the Travel being challenged is a global phenomenon. And so launching the reserve lanes is a great start. And we also think that there's opportunities for pay per use on the reserve. People want predictability and there's many different ways to get it.

Speaker 1

So we are seeing a very strong response for reserve in countries from Germany to Italy. We just launched Heathrow. And so not only that, but we see ways to tie it together with CLEAR plus And so potentially, think of it as a golden ticket, if you will, that there's fast lane opportunities both on your way out and on your return trip. So I think that there's a lot of opportunities from home to gate internationally, which may or may not be biometric, Right. People want safer and easier experiences and it's our job to deliver it to them in the best way possible.

Speaker 1

From a LinkedIn perspective, Canada and Mexico launching means that we can start to build ecosystems in those countries, But also as we're doing more in clear verified, digital marketplaces are global and so we need to be able To serve those customers and those partners. So international, we are set up for it from a privacy perspective and from an infrastructure perspective and you won't see us in all countries. I think we're pretty selective, But we're going to follow our partners, right? And our partners could be an airline or our partner could be LinkedIn.

Speaker 5

Thanks. And then Ken, just on PreCheck, I know details are limited, but any way to frame or think about the incremental margin path given You talked about a lot of the upfront investments are more behind you. How should that build, I guess, through next year?

Speaker 2

Yes. So directionally, we've been investing in this program for several years with 0 revenue. So incremental margins should be high.

Speaker 1

Seidman Becker.

Speaker 2

Yes. We are going to be recognizing the revenues on a net basis. So From that perspective, gross margins will be very, very high. And we think that while there might be some incremental staffing at certain locations to Enroll in PreCheck, generally speaking, we have a fairly large infrastructure across the country in our 55 airports. And so a lot of the labor will be absorbed in the existing Infrastructure, although there will be pockets of incremental where we see opportunities.

Speaker 2

But our tech infrastructure has been in place for several years.

Speaker 5

Thanks for the questions.

Speaker 4

Thank you.

Operator

Your next question comes from Cory Carpenter with JPMorgan. Your line is open.

Speaker 6

Thank you. I wanted to ask, if you could expand a bit Your plans for the sort of ID integration and then just more broadly the opportunity that you see in financial services.

Speaker 2

Sure. So financial services is, I would say, the most developed and largest addressable market for identity today It opens that market up to us. So integrating SORA's technology into our platform, which is a fairly light lift, it'll Basically integrated in the next few months, will allow us to go to market and we've already have pipeline in financial services. We are unable to service that pipeline Up until now, and so this is really a big unlock for us. And I would say there's a real need within financial services to Both remove friction from an onboarding perspective, but obviously fraud is a big problem as well.

Speaker 2

And the networked identity, a reusable identity Is sort of the perfect solution for this industry, right? There's significant drop off when you KYC A new client in financial services and there's significant upside if you can increase conversion. And so bringing the clear brand and the clear structure go to market with our existing member base and having this network strategy within financial services, we think is a really, really powerful combination.

Speaker 1

If If I can just add to that, I think we were impressed by not only SOAR's strong team, but their partner dashboard capabilities and so marrying Frontend and Backend marrying our both identity capabilities today and then next gen identity plus SOAR capabilities Makes it an incredibly powerful and importantly economically efficient because we already have a large user base capability for our partners. I would also just say, there's a lot of focus here at Clear, focus on travel, focus on healthcare, focus on financial services and there is a lot of structural similarities between those of Industries, both from a regulated environment, which also creates a sense of urgency, but our obsession with the customer experience. And so I think this is a very exciting moment, both launching new products like PreCheck we talked about, but Soera, Healthcare, Expanding our travel capabilities and leveraging that off a streamlined cost structure. And these are our sweet spots. We have a long track record in regulated industries driving customer experience and outcomes.

Speaker 1

And so there is a natural Connections to both Healthcare and Financial Services.

Speaker 6

Thank you. And just want to follow-up on the NextGen Identity. What are some of the next Steps or technologies you need before launching the Clearlane of the future and now that you have or you're rolling out Next Gen Identity. Is there any way to frame just how much this could Can you please speed up the check-in process for Clear Lanes over time? Thank you.

Speaker 1

So we have the capabilities today and we'll be rolling them out. You might see some new hardware in the lane, which we're very excited about. But I think it's really important to know When you think about face first and customers not breaking stride, when you think about seamlessly integrating into TSA's hardware That it should be materially faster and scalable from where we are today and we're incredibly Focused on that, right? We need to continue to drive our member experience forward in an at scale way. Travel is a mess and volumes are going to continue to grow.

Speaker 1

So the onus is on us to deploy this kind of technology, right? So face from fingerprint and eyes not breaking stride, Seamless Digital Integration into TSA Hardware. And so next gen identity and face are the unlock Before that and while I can't give you an exact second, what I can say is it's materially faster as well as Scalable because we expect volumes to grow from here going back to our 1,000,000 more everyday theme coming in 2,030, which is kind of around the corner.

Speaker 6

Thank you, both.

Speaker 3

Thank you.

Operator

Your next question comes from Mark Kelley with Stifel. Your line is open.

Speaker 7

Great. Thank you very much. Good morning, everyone. I had 2 quick ones. Just on the Gen Identity, whenever that does completely get up and running and you're kind of at scale there, does that give you an opportunity to maybe have Fewer ambassadors

Speaker 8

per terminal

Speaker 7

or given how fast I'm assuming the whole process will be, Maybe you need fewer of those folks at the airports. I guess what's the right way to think about that? And then second just quickly on the Store ID acquisition and Ken, maybe you just answered this by saying it will be integrated in the next couple of months. But when there's a change of ownership, do you have to go through like a requalification process Given that your industry is highly regulated or is that not something that happens in your industry? Thank you.

Speaker 2

Take the SOR one first and put to Karen. No, there's no issue with change of control and licensing or anything of that nature. The system Would be compliant and so as long as the system is compliant, that's all that matters.

Speaker 1

And in terms of automation, let's just start by Saying our ambassadors are awesome and they are doing an unbelievable job every day, but they're doing an unbelievable job at many different things, Enrollment and we see many more enrollment capabilities adding new products at the airport. And so We intend to drive automation around Lane of the Future and we believe that our ambassadors Can continue to serve higher and better uses for our members, for our airline and airport partners. That could be post TDC where they help with divestments. That could be new services that we start where they're helping members navigate airports more Not just the CLEAR lane, that could be an enrollment. So we see opportunities for our ambassadors to continue to serve members.

Speaker 1

I think about some retailers Who have gotten rid of the checkout lane and have their team members out on the floor really serving customers as experts. So I think there's opportunity For us to drive automation and there's good margin from automation as well as have our ambassadors Serving members and partners and I would say the highest and best use hospitality. Does that make sense?

Speaker 7

All right, great. Yes, that does. Appreciate the color. Thanks very much.

Speaker 3

Thank you.

Operator

Your next question comes from David Unger with Wells Fargo. Your line is open.

Speaker 8

Hey, thanks for taking my questions. Ken, I know you're not giving 2024 prelim guidance here, but I'm just curious internally how we should think about normalized bookings growth rates as travel normalizes? Thanks.

Speaker 2

Yes. So you're correct. We're not giving you 'twenty four guidance. I will say our Q4 guidance, if you look at We always look at CAGR because obviously coming out of COVID, you had the ups and downs. And so our CAGR has been consistently at Or above 30% and even Q4 top line CAGR is still maintaining that 30% and that's with very little TSA PreCheck Contribution, if you will.

Speaker 2

So, we feel good about our prospects. We're not giving guidance to the growth Great. But we think we have a lot of opportunity to continue to drive CLEAR plus penetration. We're going to be rolling out TSA PreCheck, enrollment provided by Clear and as well as continuing to gain traction on the Verified side.

Speaker 1

I would think of it as network product and partners Right When Modeling and there's network growth opportunity, there's product growth opportunity, there's partner growth opportunity And still our vintage, if you will, in many airports. I think when we went public

Speaker 2

None of our airports are actually under 2 years old.

Speaker 1

Right. So penetration of cities differs from a Denver, which we've been in for 13 years To an L. A. To a much newer city. And that's before pre check and before clear verified, which is really gaining traction.

Speaker 1

So It's exciting.

Speaker 8

Okay, that's great. Thanks. And then obviously you're in a position of strength in terms of the balance sheet, The share buyback, I just wanted to kind of dig into that, Ken, like

Speaker 4

the potential for stepping it

Speaker 8

up in 4Q Given you've guided for year over year free cash flow growth in 4Q and it was meaningful last year. So any color you could give there on share buyback and free cash flow return to shareholders. Thank you.

Speaker 2

Yes. So look, we're going to continue to be opportunistic. That's Our capital allocation philosophy, you've seen us do special dividends. We've increased our quarterly dividend. We have repurchased shares.

Speaker 2

We repurchased some this quarter Ready to date. And so we're going to continue to drive opportunistic capital return to shareholders. And we obviously increased our We still had some authorization $38,000,000 We increased it to now $138,000,000 So you will continue to see us deploy various methods to return capital to shareholders.

Speaker 8

Thank you.

Operator

At this time, there are no further questions. I'd like to turn the call back over to Karen for any closing remarks.

Speaker 1

Thank you for joining our Q3 2023 earnings call. I am proud of how the Clear team is executing, really proud of how the Clear team is executing and how we're growing our Our products and our partners, as you've heard us say a lot, identity is foundational. It is here and now and you're seeing that in travel and beyond. So thank you for your time today.

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Clear Secure Q3 2023
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