Clear Secure Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to Clear's Fiscal First Quarter 2023 Conference Call. We have with us today Karen Seidenbacher, 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 Truly 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 debt to non GAAP financial measures is provided in today's shareholder letter and the most recently filed annual report on Form 10 Q. These items can be found on the Investor Relations section of Clear's website. With that, I would like to turn the call over to Karen.

Speaker 1

Good morning, and thank you for joining us for our Q1 2023 earnings call. At Clear, we believe identity is the key to transforming customer experiences, both physically and digitally. We also believe trust is the oxygen the digital world needs to thrive. As the world has moved online, anonymity is the new norm. The opposite of anonymity is authenticated identity.

Speaker 1

The acceleration of the digital world has increased the sense of urgency to get identity right. When Clear, LinkedIn and its parent company, Microsoft came together to explore how we could join forces to enhance digital trust and safety at scale, We aligned on a shared vision to strengthen and democratize trust across the world's largest professional network through stronger connections, better conversations and improved outcomes. Through our recently launched partnership, we are empowering LinkedIn's over 200,000,000 U. S. Users to verify their identity on their profile using CLEAR for free.

Speaker 1

Together, we are making it safer and easier for people to find jobs, Connect and Build Community. Verified profiles provide a holistic understanding of those users' professional identities. It's not just about who you are, it's about all the things that make you, you. This partnership isn't about driving CLEAR plus memberships, It's about furthering powered by Clear, our identity as a service platform to expand our connected identity ecosystem. It's about bringing the trusted, predictable, friction free experiences you've come to expect in airports to the digital world.

Speaker 1

We remain intent on providing American travelers with the experiences they rightfully deserve. Travel is absolutely booming. In March, we saw our highest average daily verification numbers. And in the Q1, over 10% of checkpoint traffic in our airports came through a CLEAR lane. Travel is hard and getting harder.

Speaker 1

As we continue to stress, CLEAR is on the side of the American traveler. We hear our members when they say they are always looking for Clear and More airports, and we hear them when they say they want the joyful journey we provide in more places. Clear gives our members predictability and control over their time and their experiences. This is now the expectation. With 52 Clear Plus and 17 Reserve airports, we are expanding our network across the country and around the world.

Speaker 1

Our expanded network is, of course, good for our members, and it also allows us to launch new products like TSA PreCheck enrollment and Reserve with strength across a larger footprint. We are focused on building products for all travelers, whether you travel once a year or once a week. I would be remiss not to mention our newly revamped CLEAR app with an awesome new Home2Gait feature driving predictability and friction free day of travel experience. I highly recommend everyone on the call uses it. As always, we remain focused on growing members, bookings and free cash flow.

Speaker 1

I want to thank the Clear team for their continued great work this quarter. With that, I will turn the call over to Ken.

Speaker 2

Thanks, Karen. The first quarter finished strong With revenue up 46% and bookings up 39%, we see continued momentum into the 2nd quarter. Clear plus bookings growth came through a variety of channels, word-of-mouth, in airport sales, digital marketing and our partners. The Inter Report channel represented over 60% of new bookings, while partner channels, which include United, Delta and American Express, represented less than 20% combined. We've never been traditional marketers.

Speaker 2

No one wakes up and Googles, how do I get through airport security using biometrics? With 52 airports, 139 lanes and our great ambassadors, our physical footprint is unique and drives efficient growth. It's why such a large percentage of our bookings come from our in airport channels. For the 2,500,000 passengers who come through an airport on any given day, They can't miss our pods, our people or our experience in action. We will continue leveraging this physical footprint while incorporating our partner channels.

Speaker 2

If you think about the top 100,000,000 travelers in the U. S, they belong to many different loyalty programs. Most belong to an airline program, a car rental or hotel loyalty program and or have an American Express card. These partners are excited to bring the clear experience to their customers and align with our brand and our products. Let's look at our Amex partnership, for example, as we near the 2nd anniversary.

Speaker 2

This is a 3 year deal with 2 1 year renewal options. It's a true win win for Clear, Amex and our shared customers. This partnership has driven steady membership growth and expanded our TAM indexing to a younger demographic. Platinum members use Clear at similar rates with similar NPS scores to our overall base. From a margin perspective, we saw 12 50 basis points of operating leverage in the quarter, with total expense growth of 31% versus revenue growth of 46%.

Speaker 2

This excludes the non cash, non operational items called out in the release. We achieved this operating leverage while opening 12 new airports and expanding 4 markets subsequent to Q1 'twenty two, our largest number of new launches in a 12 month period. As discussed in our letter, newer airports tend to be margin dilutive in the near term. In fact, the new launches and expansions impacted operating margins by about 3.50 basis points this quarter. We expect these markets to follow historical margin improvement trends as we have seen in dozens of airports in the last 13 years creating this business.

Speaker 2

Today, we spoke about our newest powered by Clear partners, LinkedIn and Health Gorilla. I will add that we see exciting traction on on the platform side. And as platform bookings scale, this is another driver of operating leverage as we have made significant investments in the platform over the past several years. Free cash flow in the quarter was $51,000,000 up 165%. I want to reiterate last quarter's comment on equity based compensation.

Speaker 2

We absolutely view this as a real expense. Free cash flow after employee and founder stock comp was $36,000,000 up 4 70%. We continue to expect full year growth in free cash flow before and after stock comp. Total cash and marketable securities as of March 31 was with $779,000,000 and reflects approximately $6,500,000 invested in share repurchase at an average price of $22.94 as well as $2,400,000 used to net settle RSUs. In addition, we made a $6,000,000 minority equity investment in landline, a company well positioned to help securely scale off airport screening.

Speaker 2

In addition to repurchases, today we announced This dividend is a result of Clear's advantageous corporate structure put in place when we went public. Through the utilization of favorable tax attributes, Actual taxes over minimized, enabling the return of capital to our owners. Our bookings guidance of 158,000,000 to $160,000,000 implies year over year growth of approximately 30% and excludes any contribution from PreCheck. We continue to expect operating leverage and free cash flow growth on a full year basis. As owner operators, Capital allocation and optionality are cornerstones of our strategy.

Speaker 2

Whether it's share repurchase, dividends, organic growth For acquisitions, we are focused on driving long term value. We will now go to Q and A.

Operator

Thank you. We'll now be conducting a question and answer session. Keypad. Our first question comes from Dana Telsey with Telsey Group. Please go ahead.

Speaker 3

Good morning. Nice to see the progress. As you think about the soft launch of TSA in mid-twenty 23, are you talking second quarter or third quarter? And any update on how you expect revenues to build from that? And then also on the net member retention, Anything marketing wise that you can do to win back previously canceled members or anything you're seeing there?

Speaker 3

And then just any adjustments that you're seeing in the new airports being added of how that performance trends? Thank you.

Speaker 2

Hi, Dana. Good morning.

Speaker 4

Hi.

Speaker 2

You got 3 in there, so that's good.

Speaker 3

Yes. Thank you.

Speaker 2

We'll start with PreCheck. Look, we're really excited to launch this program. No one wants to get it launched more than us to the traveling public. And as we mentioned last time, we got our ATO, which is the authority to operate in December. Our teams continue to work together with TSA to make progress.

Speaker 2

There's a process to follow. We're following it. And we don't include any pre check revenue in Q2 guidance, we would expect it to be a back half, and it would build as we roll it out from airport to airport, renewals would happen faster.

Speaker 1

So Dana, don't forget that there's 2 parts to the business. There's the renewal part for the existing member base And then there's the 2 member additions. And we're excited about both. One's more digital and one would happen more in person.

Speaker 5

Got it.

Speaker 1

Your next question the next question was on retention.

Speaker 2

So from a retention perspective, retention is Definitely stronger than we anticipated. It continues to be. And part of that is the win back strategy. So we have a lot of organic win backs. So people just At the airport, who maybe their credit card didn't charge properly.

Speaker 2

So when they come through the lane, they would just swipe their credit That's about 2 thirds of our win back activity. So that continues strong. We have ongoing programs to win back people. That's a regular part of our business. And overall, I would say that continues with strength and retention in general is higher than where we expected to wind up long term in the upper 80s.

Speaker 2

And as far as new airports, we talked a bunch about new airports in our letter. The new airports are very fast breakeven, cash breakeven usually within a year. And costs from a Direct cost perspective are definitely higher in the beginning. Their margins they tend to be margin dilutive. And then over time, as we increase penetration in those airports, The margins expand.

Speaker 2

We have very high incremental margins. And so what I would say is we opened more airports in the last 12 months than we ever have. It's a record. And so there is some margin impact from that. But as we've seen Operating the business since 2010, we see a regular path of margin expansion as we scale penetration.

Speaker 2

And we mentioned in the letter, We have 2% MSA or CSA penetration from a population perspective in the 47 airports and then our top 5 are at 5%. So we think there's a long runway for growth.

Speaker 1

And Dana, just to add to that, when you talk about the power of the network effect, when we open a new airport, 100 of people show up on day 1 to verify, right? So those are people who already have Clear and wouldn't have been able to use it in that air But that extra utilization is so powerful from a retention growth add all those good things. And so you are seeing new airports ramp much faster than they did years ago because right it's number 52 to the network not number 20.

Speaker 3

Perfect. Thank you.

Operator

Next question comes from Josh Reilly with Needham and Company. Please go ahead.

Speaker 4

Hey, guys. Thanks for taking my questions. Congrats on the strong results and the bookings guidance here for Q2. I guess the question I'm getting a lot is, And you highlight this in the shareholder letter, but the penetration for airports you operate still remains very low. However, offsetting that is the impact of the slowing growth in TSA boarded passengers over the next couple of quarters.

Speaker 4

How do you maintain this kind of strong growth trajectory even if PSA passenger growth continues to slow near term Just simply due to the tough year over year comps.

Speaker 2

So, thanks for the question. So we think Travel will continue to grow. We have capacity growth in the back half that we've seen from airlines. But our growth is diversified. It comes from a number of different channels, Right.

Speaker 2

So we have in airport growth, which we said in the letter, 60% of our growth. We have partner channels. And so we think That our ability to growth is not necessarily impacted on any given quarter by The delta in the TSA volume growth, so we think we have a lot of opportunity.

Speaker 1

Look, I would add to that. If you specifically look on a city like New York. New York had record 1st quarter this is Port Authority data, record 1st quarter in travel 30 $3,000,000 that was up $1,000,000 from pre pandemic 2019. So you see airlines that have said capacity is still expected to be up 10% 15% in the second half of the year. In March, we saw our highest average daily verifications.

Speaker 1

And so when you talk about that 2% penetration on coverage, right, in most of our airports. There is a ways to go as Clear is still pretty new to a lot of these travelers, right? We've owned there's a I think We wrote we talked about a third of our airports are less than 3 years old. This is still a pretty new concept overall. And so when you talk about the sort of vintage, if you will, of our airport, the power of word-of-mouth, the ambassadors on the ground, our partners, which Ken talked about, United Delta and American Express, being Also growth engines and introducing Clear to a expanded TAM.

Speaker 1

Ken can talk a little bit to American Express if you want and sort of the expanded demographics there. And so there are many ways for Clear to grow, not to mention new products, bundles and things of that nature. So we continue to believe that these are early days, but I will also to say, we just are incredibly bullish on travel and it's hard and getting harder. And so the fact that there is growth, the fact that people are looking for the experiences they have outside the airport in the airport, the fact that we have low penetration, a stronger network and offering and great partners, Early days.

Speaker 4

Got it. And then just a follow-up on the pre check offering. Is there anything going on in the testing phase with the TSA that gives you more confidence around that timeframe for the second half launch than maybe a quarter or 2 ago.

Speaker 2

Yes. So after receiving the ATO in December, There is a process and we continue along with that process and we are making progress.

Speaker 4

Got it. And I'll just sneak in one last final On the Amex Green Card, this is the 1st full quarter, I believe, with that in the market. What type of adoption trends did you Have you seen from that card thus far? Thanks, guys.

Speaker 2

Thanks. So I won't speak to any one particular portfolio within the Amex family, but we are getting a lot So why don't I just give a little bit of insight into the partnership overall. And what I would say is this continues to be a great partnership. The value of Clear to these members is evident. We see usage trends in NPS scores for the Platinum members and In line with the rest of our base.

Speaker 2

So from a value perspective, we're delivering value to those members. It's a great way to introduce Clear to the new population, and it's expanded our TAM. We talked about over a third of our markets are still less than 3 years And the penetration is low, as Karen just mentioned. So this is a really great way to introduce Clear to a newer and a younger demographic, Right. It's expanded our TAM.

Speaker 2

We skew younger with Platinum. It indexes to the under 45 year old demographic. And from an NPV and the lifetime value, This is really exciting. There's a low CAC, obviously. There's high renewal rates.

Speaker 2

And given the scale of this partnership, the average revenue per Member is well below our overall retail price point. So right, the incremental member growth is contributing less to our bookings and revenue, But more to the expansion of our TAM and to our membership base in general. And as we mentioned in the letter, 60% of new bookings are coming from the in airport channel and less than 20% overall of the new bookings are coming from the partner channels, including Delta United and Amex combined, but it continues to be a great partnership for us.

Operator

Our next question comes from Michael Turrin with Wells Fargo. Please go ahead.

Speaker 6

Hey, thanks very much. It's David Unger filling in for Michael Turrin. I had a bunch of AmEx, but we don't have to keep going on AmEx. So the 2Q bookings guide is It's pretty strong actually. At the high end, it's suggesting 30% yearning year growth.

Speaker 6

Can you guys talk about some of the moving pieces that's sustaining that pretty strong growth rate We're more right in the cycle. It's above where most of us were originally modeling. So any seasonality to be mindful of there? Thank you.

Speaker 2

I would just say, in general, our business is fairly consistent to understand, right? We have renewals of prior year revenues, our bookings. We have multiple channels, as I've been saying In this call, multiple channels that are contributing to our growth. We have in airport, we have ambassadors, we have a physical presence, and we have 2,500,000 people coming through the airports on a given day and they can't miss us, right? There's a physical presence, we have ambassadors engaging with them.

Speaker 2

So there's multiple channels to drive that growth, plus the retention, and plus we've taken a little bit of pricing.

Speaker 1

If I can just jump in, maybe we've done a bad job of explaining that this is a great business and members are passionate about CLEAR. And so the more airports that we open, the more people join. There's family attach rates and Travel is hard and getting harder, and I do think that the experience that you see outside of airports, whether it be ordering food online compared to what that Experience was 10 years ago or flagging down an Uber. This is the new consumer expectation and people are looking for that in travel. They're looking for the Home2Gait app to know when to leave their house to get to the airport or to get to their gate with 40 minutes because we've mapped it all out.

Speaker 1

They're looking for predictability and friction free experiences and our brand has now become synonymous with that. And I do think that these when we talk about early days, there's a bunch of new airports. When you look at the growth coming out of 2019 are heading in and then sort of reaching to a halt with COVID. We've expanded our airports. We've added 19 now in a little less than 2 years.

Speaker 1

So I think it's just a confluence or convergence of events of customer expectations, the growth of the network and new products that we're offering and then the power of the network to retention, to gross And to partners and you are seeing our brand show up in more places, whether it be our partnership with LinkedIn or when you use it at a sports stadium or at a hospital. And So this concept of friction free experiences and a brand that stands for trust and what we did with HealthPath and COVID, I think it's a testament To the vision and to the team making it happen.

Speaker 6

That's all, Lawson. So obviously, I appreciate the special dividend. You guys still have a lot of cash on the balance sheet. Ron and Paul, I would love to hear. And free cash flow is still buzzing very nice.

Speaker 6

Just bigger picture, would love to hear about the capital management philosophy, if you could share that with us. Thank you.

Speaker 2

Sure. I think philosophically, we believe in being opportunistic. And so we want to maintain maximum flexibility. We're opportunistic And we're owner operator, so we're aligned with shareholders in general.

Speaker 6

Thanks, guys.

Operator

Our next question comes from Paul Chung with JPMorgan. Please go ahead.

Speaker 7

Hi. Thanks for taking my questions. So just on the LinkedIn partnership, talk about how that deal came about, how to kind of Think about monetization in respect to that 200,000,000 sub base. What other kind of social media platforms or other use cases we should be thinking about. Essentially, how should we kind of think about platform contribution through the year and kind of longer term

Speaker 6

and I have a follow-up.

Speaker 1

Perfect. We're really excited about the LinkedIn partnership because big picture, trust online matters and the acceleration of the digital world has created an absolute sense of urgency to get identity right. So many things that you're hearing about today in the news, if you sort of strip them back, You realize identity it's about identity, identity is foundational. So, LinkedIn and Clear and Microsoft definitely came together with a shared vision that trust online matters, trust and safety for their 100 of millions of users are core to their brand and to their future. And so it was that alignment.

Speaker 1

At some level, we always say our best form of BD, our Happy Clear members. I think when people go through the experience, they start to realize the other places that you could use Clear. And so having a verified badge on your LinkedIn profile means users are more likely to be considered for a job to have their InMail opened or to build connections. And so when you look at what the future is, it's to have 100 of millions of LinkedIn members with verified badges on their profile and then to have reasons, right, or benefits for those badges. So again, in mail, key parts of job searches, someone more likely to open, your request for a connection.

Speaker 1

And those things create powerful networks in the new age of, I would say, anonymity online and this is authenticated identity online, the absolute opposite. So I do think that this serves, as a model for other online marketplaces and networks and one that CLEAR can play an important role in. Also as I talked about earlier this morning, this is not about selling CLEAR Plus memberships. This is about our identity as a service platform business. And so you will see that scale on both members and revenues over this year and in the future.

Speaker 1

It's a core focus for us. The vision that we had 13 years ago was absolutely right. And I think the world has now recognized the need for trust online is crucial and Clear is a really important partner in that equation.

Operator

Very cool stuff. And then secondly, can you talk about The strength of free cash flow

Speaker 7

in the quarter, anything to call out there? So earnings continue to improve.

Operator

Bookings growth, being accrued nicely. As we move through

Speaker 7

the year and think about seasonality, can we expect this kind of quarterly run rate of free cash So that kind of builds into 2Q, payment out in 3Q on accrued and then kind of rebound in pace in 4Q. Is that the right way Just kind of think about it. And then given the strong start to the year, do you think we're on track to exceed 'twenty two levels? Thank you.

Speaker 2

Yes. So from a free cash flow perspective, look, generally speaking, we're an asset light business. We are opening airports, but They're generally cash breakeven in under a year. From a free cash flow perspective, we have said that we expect to grow free cash flow on a full year basis year over year in 2023, and that stems from bookings growth and operating leverage, which we also said we're going to generate operating leverage in 2023 on a full year basis. As far as cadence, You are correct that there will be a cash outflow in Q3 as there was last year.

Speaker 2

But again, on a full year basis, given the way our business works, we have bookings which generally GAAP revenue when we're growing, and that's the nature of a subscription based business. And it flows to the bottom line from a free cash flow perspective as we collect cash upfront. To reiterate, yes, grow free cash flow on a full year basis versus 2022, both before and after stock comp, and demonstrate operating leverage on a full year basis and cash outflow in Q3. That's correct.

Speaker 7

Great. And then just to follow-up on the leverage. How do we think about kind of modeling seasonality, investments and Overall trends of the year between the kind of OpEx line items, the pace in 2Q and where we can see more leverage in the model. Thank you.

Speaker 2

Sure. Without getting into specific Quarterly guidance, generally speaking, I would say G and A is the area where you see the most operating leverage. R and D is still going to be an area of investment for us, although we should demonstrate operating leverage there as well. From

Speaker 7

a Cost

Speaker 2

of revenue share fee, we expect that to be fairly stable over time. There is some quarterly volatility, as we saw in Q1. And finally, on The field the labor line, that should now grow in line with opening new airports, number 1. Obviously, when we open new We're hiring new people individually at that local level, and there should be some growth along with volume and opportunities to enroll new members, but generally, we expect to see scale operating leverage across the board, mostly most in G and A, and then less so in the cost of revenue, which is more of a variable.

Speaker 7

Great. Thank you.

Operator

Our next question comes from Ananda Baruah with Loop Capital. Please go ahead.

Speaker 5

Yes. Good morning, guys. Thanks for taking the questions here. Yes, 2 or 3 if I could. Ken, you mentioned that I think in response to one of the questions that you have capacity growth in the back half of the year or jumping along those lines.

Speaker 5

And I was wondering what that kind of refers to, some context there would be great. Thanks.

Speaker 2

Capacity growth? I don't actually know what you're referring to from a capacity standpoint.

Speaker 5

It was one of the questions around Air travel. And yes, we can take it offline. It's just a clarification. From a macro perspective,

Speaker 2

yes, We've seen the airlines talk about capacity growth in the back half.

Speaker 5

I see. Okay, great. Super helpful. And then I guess just sticking kind of with that theme, You guys have a like return to business travel view in terms of pacing and impact and whether it's for you guys or for the industry, I would just love to get any context there that you guys might have as an opinion at least.

Speaker 1

My Opinion is being on the road for a few conferences both at the HIMSS conference for healthcare in Chicago and the Milking conference last week in LA. It is there's overflow rooms that are holding overflow rooms. It's insane. So we continue to have a very bullish outlook on travel, on both the leisure side and the business side. We send surveys out to members, which is really the way that we know it.

Speaker 1

And I think We continue to see a return to business travel staying strong.

Speaker 5

Karen, that's super helpful. Maybe to try to drill down a little bit. Do you have any sense or any opinion on like what inning, whatever normalized Travel might look like business travel might look like ultimately. Do you have any opinion on what inning we might be to the return of that normalized Currently.

Speaker 1

Yes. I do not because we focus more on holistic, right, number of people getting on planes and coming through airports on the travel side of our business. And I would say that holistically, again, and that's why I was talking about the airline path going up 10% to 15%. I think most planes are oversold these days. And so we continue to be very positive on the industry as a whole and volume, but I don't have a good feel for you for breakdown of business.

Speaker 5

No, That's all super helpful context. I appreciate it. And I guess last one for me is, any I guess another one, Like what would be what's a good way for us to think about lane additional lane expansion opportunity inside of Existing airports that you guys have. And that's it for me. Thanks.

Speaker 2

Yes. So that's a great question, and we're actually very focused on expanding Our capacity, two recent examples, in Dallas where we've seen a lot of growth membership, we actually Expanded to an additional pre check

Speaker 1

of to an additional pre

Speaker 2

check line recently, I think it was last week or the week before. And this summer, we'll be launching in the international terminal in Atlanta, which is a which is probably our most constrained market. And so that will increase capacity for our members fairly dramatically.

Speaker 1

And I think last quarter we added a terminal in NewWorks. So we continue to focus from an obsession with the customer experience perspective on technology, on lanes, on innovation. And so you'll continue to see both new airport expansion, lane expansion within our current airports and innovation that drive throughput and then you saw an investment in landline. So we think That there are so many opportunities to continue to transform the customer experience because it's not just today that we're excited by travel. We think by There's going to be another 1,000,000 people coming through airports on top of the 2,500,000 that are there today.

Speaker 1

So when we think about lane and airport of the future, There's a lot of innovation going on.

Speaker 5

Great context. Thanks so much, guys.

Operator

There are no further questions at this time. I would like to turn the floor back over to Karen Seinenbacher for closing comments.

Speaker 1

Thank you for joining our Q1 2023 earnings call. I think as you heard us say, identity is foundational in travel and beyond. We're excited with the strong progress of both Clear's B2C and B2B dual growth engines. And as always, I want to thank the Clear team for all of their great work this quarter. Thank you.

Operator

This concludes today's presentation. You may disconnect your lines at this time. Thank you for your participation.

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