Clear Secure Q4 2023 Earnings Call Transcript

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February 28, 2024

There are 9 speakers on the call.

Operator

Good morning,

Speaker 1

and welcome to Clear's Fiscal 4th 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.

Speaker 1

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 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 ks. 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 2

Good morning. Clear's 4th quarter and full year 2023 financial results reflect our continued focus on growth in members, bookings and free cash flow. This quarter, we exceeded 20,000,000 members on the platform, an important More members joining the Clear platform means more value for our partners who are focused on creating friction free experiences for their customers. In 2023, revenues grew 40% and operating margins expanded by over 1300 basis points. We generated $200,000,000 of free cash flow.

Speaker 2

At Clear, we are obsessed with our members' experience, and in 2023, we did not consistently deliver the in lane experience that our members have come to expect. As you read in our letter, we are fixing this, delivering our members the Clear experience they know, love and rely on. In December, we launched NextGen Identity. And with that, CLEAR is operationalizing the 1st and only at scale standardized digital identity, the absolute unlock for the lane of the future. The Clear team is doing an amazing job with our next gen identity upgrades and the passion our members have for both CLEAR and our ambassadors, as well as the excitement they have for the lane of the future.

Speaker 2

Travel continues to be strong and travelers are craving predictable journeys and innovation, exactly what CLEAR is known for. Next gen identity enables the CLEAR lane of the future, a series of new technologies rolling out this year to deliver the great experience that our members have come to expect from CLEAR. Bringing TSA PreCheck enrollment provided by CLEAR to life has been an incredible labor of love. We think every traveler should have it. It is such a great program.

Speaker 2

And at $1.30 per month, which is less than a cup of coffee, who doesn't want to keep their coat and shoes on and their laptop in the bag? The key here is making enrollment easy and accessible to all travelers. We are working hand in hand with our partners to make this happen. Today, consumer experiences are one touch and that is the customer expectation. We are focused on delivering friction free enrollment, no appointment necessary.

Speaker 2

Last week in Newark, we opened before sunrise, and less than 2 minutes later, our first enrollee walked right up. The team was excited to serve them and they were thrilled to enroll on the spot. As I often say, travel is hard and getting harder and our job is to make it safer and easier for all travelers. I am proud of the work that our team has done and we cannot wait to bring this nationwide. Clear Verified continues to gain momentum.

Speaker 2

You cannot pick up the paper today or go online without reading about challenges that Trusted Identity can solve, whether it's the need for age verification on social media, the problems caused by online anonymity, entire systems going down because of fraud or marketplaces where stolen goods are sold, a universal digital identity is the solution. In healthcare, hospital systems are finding significant value in customers. Clear is uniquely positioned to become the trusted identity layer of the Internet. This year, our continued focus will be on member experience, bookings growth, margin expansion and free cash flow. I will now turn it over to Ken for a discussion of financials.

Operator

Thanks, Karen. In Q4, revenue grew 33%, and we maintained a long term 30% bookings CAGR, while generating strong incremental margins. Cash flow from operations was $94,100,000 and free cash flow was $90,400,000 up 27% year over year. For the full year, we generated $225,000,000 of operating cash flow and $200,000,000 of free cash flow, up 46%. Pro form a after deducting normalized stock comp, free cash flow grew 42% in the quarter 80% for the full year.

Operator

We returned $110,000,000 of capital to shareholders in Q4 $210,000,000 in the full year, while shrinking our share count. Active Clear Plus numbers were 6,700,000 up 23%. We have seen continued ARPU growth sequentially and year over year as the impact of pricing rolls into revenue. Annualized Clear plus member usage was 8.1x, down 0.5 versus last year. Mix matters, and as we've expanded our non airline partner channels, there is a utilization difference, which is driving the decline.

Operator

Airline channel members have about 2 times the usage of non airline members. In Q4, our results include some items I want to highlight. We incurred a cash severance expense of $2,900,000 related to the streamlining actions we announced last quarter. That impacted R and D by 1,500,000 dollars G and A by $1,100,000 and sales and marketing by $200,000 We expect to incur additional severance expense of $900,000 in Q1, primarily hitting R and D as we completed some additional streamlining this month. We also incurred $2,900,000 of expenses related to the NextGen identity upgrade, consisting of $2,000,000 of search ambassador hours and $900,000 of enrollment expenses.

Operator

In Q1, we expect a similar amount of NextGen expense, which will normalize by April. To put next gen in perspective, we have already upgraded millions of members representing around 85% of our verification volume, consuming 100,000 incremental labor hours since December. We should see strong operating leverage on the direct salaries line as we progress through this year. In the quarter, we also benefited from a reversal of $9,600,000 of previously expensed stock comp relating to departed team members expiration of the pre IPO performance award unit. Normalized stock comp was $11,800,000 down 25% year over year.

Operator

Excluding these items, our OpEx was down around 1300 basis points as a percentage of revenue and we achieved 46% incremental operating margins. Annual Clear Plus net member retention was 86.3% in the quarter. We look at both member retention and dollar retention. This is particularly important in 2023 when after taking almost no pricing for the 1st 12 years, we took significant pricing for airline family and standard members. For the airline channel specifically, where we reduced the discounts available to frequent flyers, pricing was up between 35% 50%.

Operator

We are pleased that given these increases, we experienced only a modest impact on member retention and our dollar retention was up mid single digits year over year to around 90%. Our net member retention metric is impacted by reactivations or win back activity. Typically around 2 thirds of our reactivations happen organically in the lane with all the focus and prioritization on next gen upgrades, reactivations in the lane are temporarily below trend. Net member retention settling in the upper 80s remains our expectation. Over the next several quarters, we expect the cumulative impact of pricing, member mix and next gen will bring us below those levels before rebounding.

Operator

On average, Clear members are paying less than $10 per month, which is an incredibly compelling value. We will continue to focus on member retention and dollar retention as we drive bookings and free cash flow growth. In Q1, we expect revenue of $172,000,000 to $174,000,000 which at the midpoint represents 31% year over year growth. We also expect total bookings of $178,000,000 to $183,000,000 which at the midpoint represents 21% year over year growth at a 29% long term CAGR. Consistent with prior years, Q1 bookings are down sequentially versus Q4 reflecting a larger renewal pool in Q4 versus Q1 and this year a lower sequential pricing benefit.

Operator

While guidance includes incremental pre check revenue, keep in mind we just began online renewals in January and our first opened just last week at Newark. As new businesses like PreCheck and Clear Verified continue to ramp, we are widening our guidance range as they are early stage relative to Clear Plus and small timing differences can move bookings from 1 quarter to another. For the full year 2024, we expect to deliver strong revenue and total bookings growth, expanding margins and free cash flow growth of at least 30%. With that, let's go to Q and A.

Speaker 1

Thank you. Our first question comes from the line of Joshua Riley with Needham and Company. Please proceed with your question.

Speaker 3

All right. Thanks for taking my questions. Nice job finishing up the year here. Maybe just starting on net member retention, can you just discuss maybe in some more detail some of the nuances in terms of the calculation since it's based on people versus dollars and how the normalization of travel trends is impacting this figure versus the next gen ID upgrade that you mentioned also impacting it? Maybe just give a sense of the magnitude of each of those items?

Operator

Sure. Thanks, Josh. Good morning. So there's a couple of things going on. One is I would just highlight that we're focused both on the public retention metric is based on members, right?

Operator

We're also focused on dollars, as I mentioned in the opening. Our dollar retention was up mid single digits year over year to around 90%. So we're really pleased with the performance there. The public metric, as you mentioned, is a trailing 12 month metric. And so the trend of growth matters there.

Operator

And there's also 2 components. There's gross and net. So the gross retention is the year over year performance of how many members are retained and then the difference between gross and net would be the win back activity or reactivations. About 2 thirds of our reactivations happen in the lane and we are definitely running below trend due to the next gen upgrade process on the reactivation piece. And so as we cycle through the next few quarters, as we lap pricing, and as we lap mix, mix is also a factor, we had a much larger percentage of year 1 renewals in 2023 versus 2022.

Operator

And just like every subscription business, those tend to carry lower retention rates than the more mature cohorts. So as we cycle through those, it will be a more normalized rate. We expect it to be in the upper 80s over the next few quarters. And so net net, very happy with the performance there. And that's probably what I would say there.

Speaker 3

Got it. And then we've all seen the press articles on the changing competitive landscape within the security lane. How do you see the changing landscape playing out here with airlines and the TSA working to develop their own more efficient processes based on biometric data as well?

Speaker 2

Yes. Hi, Josh, it's Karen. Look, with a 1000000 more travelers coming through airports by 2,030, technology is the most important solution for airports, for airlines, for the TSA to do the and the safer and the easier. And it's consistently been brought to the checkpoint since we started in 2010, right? There was pre check, AIT, CT scanners.

Speaker 2

And we always believe that biometrics were going mainstream because they make it safer and easier. So biometrics coming to the checkpoint has been expected and I think it's a good thing for American travelers and for security. At Clear, biometrics aren't the product, right? They are a feature. And so what we're really focused on is about delivering an experience that is free to say whether they travel once a year or once a week and you're going to continue to see more products from us to make sure that we can deliver to all travelers.

Speaker 2

It's also the reason that we've been talking about NextGen Identity. We started talking about it publicly last quarter, but as you guys know, we've been working on it since 2020. Would have loved to have rolled it out last year, but it's going to have a great impact on the travel experience this year. So what we're focused on is interoperable, universal, digital identity because travelers use multiple airports and airlines. So no matter status, using Clear's next gen identity to get through quickly and predictably and then adding services on either side of the checkpoint is the unbelievable customer experience.

Speaker 2

But we expect over the next few years, the entire Checkpoint should be biometrics, right? It's safer and it's easier. But again, it's the experience that you're delivering off that holistically.

Speaker 1

Thank you. Our next question comes from the line of Cory Carpenter with JPMorgan. Please proceed with your question.

Speaker 4

Hi, good morning. I wanted to ask what you're seeing with travel demand this year. We've heard some mixed messages from some of the travel companies. So curious what you all are seeing and then how that is impacting your 1Q bookings outlook? Thank you.

Speaker 2

We continue to be very bullish on travel. I sound like a broken record since we went public, but travel and experiences continue to be a bright spot of consumer spend. Airports have been putting out their volume data for last year and it is records across the board pretty much. And then there's growth cities like in Austin that are just off the charts with the kind of growth over the past few years that you really have never seen in airports. Business travel is rebounding.

Speaker 2

If I look at our business mix of verifications, it was up 300 basis points year over year. I would say there's a normalization of leisure. Premium remains strong. But what we really focus on are number of people coming through airports. So whether it be pricing in airlines or hotels, unless it's extreme, we really don't see that impacting the volume that we see.

Speaker 2

Travel has really become part of the zeitgeist and there's so many drivers of it. So we continue to be very bullish on travel and specifically for the Clear plus business, people coming through airport security checkpoints. I also think, again, going back to what I said to Josh of biometrics going mainstream, that travelers are showing up at airports with higher expectations. And I think you see a lot of new builds and new launches. Denver launched a new lane.

Speaker 2

You're seeing new concessions. You're seeing technology. That is really meeting the current customer expectations of what they have outside of airports. And I do think that the easier, the more friction free we can make the experience that airlines and airports can make the experience, the more you'll continue to see people travel.

Speaker 4

Thank you. And just a quick follow-up, any color you're able to provide on what the TSA enrollment in person rollout could look like from here now that you're in New York and you have renewals online? Thank you.

Speaker 2

You mean pre check?

Speaker 4

Yes, pre check, sorry.

Speaker 2

Okay. Do you want

Operator

to Yes. So, the rollout plan from here is that we are going to add we expect to add a few airports over the next coming weeks and then roll out to the rest of the country throughout the year, all subject to TSA approval.

Speaker 2

I will say on Newark, it's incredibly exciting. We've obviously been talking about our excitement around TSA pre check enrollment provided by CLEAR for several years. If you go to Newark, you'll see that we're open 7 days a week, 14 hours a day with American travelers. The opportunity over time pending TSA approval to roll this out across the country is incredibly exciting and we are very

Speaker 1

York. Thank you. Our next question comes from the line of Ben Miller with Goldman Sachs. Please proceed with your question.

Speaker 5

Thanks for taking the questions. Maybe 2 if I can. First, just on the retention being a little lower, it implies maybe the gross adds were better. So any color you can share just on particular channel strength to call out, either in airport or partner? And then, just on the guide, any color to quantify the impact from Easter shift on travel patterns and or the beer that's implied in the guide?

Speaker 5

Thanks.

Operator

So I'll start with the guide. So generally speaking, we have a much higher backlog of retention in Q4 versus Q1. So the sequential decline from Q4 to Q1 is totally typical. Last year, we had a much larger benefit from a pricing perspective sequentially. So if you look at 2023, it was a very big year for pricing.

Operator

We took price on basically every cohort. And so when you look at Q1, 2023 versus Q2 Q4 of 20 22, we had the benefit of family airline channel and standard renewals. And so if you back out that impact, you really have a much more similar sequential change from Q4 to Q1. So that's what I would say about the guide. I don't think I don't have a specific comment on Easter shift there.

Operator

And then in terms of the channels, I think our teams performed extremely well in Q4, both in airport and some of the marketing channels. You did see a sequential uptick in marketing spend. So we took some opportunities where we saw the ability to accelerate the gross adds from that perspective. So no specific channel of strength, but obviously just strong execution across the board in Q4.

Speaker 1

Thank you. Hello. Our next question comes from Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Speaker 6

Hi, Karen and Ken. Nice to see the progress. As you talked about the experience and the enhancements that you're making, what are you doing? What should we see as we go through the year? Obviously, speed is definitely one thing, but you also mentioned the new handheld devices.

Speaker 6

When will those be rolled out and how are you looking at it? And then just for this year overall with TSA PreCheck, are there any expenses that we should be mindful of as we go through the year for the model? Thank you.

Speaker 2

I'll take Ken take the pre check, Dana, and then I'll talk about the technology rollout this year.

Operator

So from a pre check perspective, we've talked about, I think, over the last probably 8 quarters that we've been carrying expenses overhead for pre check. And that's why we're so optimistic on our high incremental margins. One of the reasons for in 2024, we are bullish on margin expansion is because we have been carrying a lot of overhead. So the incremental expenses you'd see from pre check really would be around staffing and we have been carrying some extra staffing as well. So, I don't I wouldn't say that you're going to see anything meaningful.

Operator

Certainly, we'll be marketing the product as well. But we do believe that pre check should lead to fairly high incremental margins.

Speaker 2

And in terms of the technology rollout, Dana, that you should see this year, some of which I can talk about and some of which I can't yet talk about, you will see new pods from CLEAR that are phased first pods. We're calling them ENVY, which is a combination of enrollment and verification. And they are faster, they are slimmer, so we can have more and they are face first pods. And so that's really important from a power of the camera, a capture, things of that nature. From there, the pods transmit digital identity to these handhelds and then it is a tap to transmit those digital identities into the TSA system.

Speaker 2

And so members will be faced first, fairly break stride and not have to take any IDs or boarding passes out of their pockets. There will remain always randomization from a security perspective. And so those things will really contribute to not only speed and efficiency, but member experience and security.

Speaker 6

Thank you.

Speaker 1

Thank you. Our next question comes from the line of Mark Kelley with Stifel. Please proceed with your question.

Speaker 7

Great. Thank you very much and good morning. If I can just expand maybe on the last couple of points you made there Karen, on user experience. There's a lot that's in your control, like some of the things you just outlined, some are maybe you're more reliant on the CAT II machines and things like that rolling out. I guess what's more important in your mind, the things you can control or the things you cannot control directly?

Speaker 7

And then the second one is in terms of surge staffing around the NextGen ID initiatives, does that come out of the P and L starting this quarter or we can see a little bit of that until you get to 100% of folks upgrading? Thank you.

Operator

Yes. In terms of this, I'll answer the second question first. The surge staffing, we talked about in Q4, dollars 2,000,000 and a similar amount in Q1. And I would say that that does come out. Now of course, we're still growing our footprint, right, and we still have verification growth.

Operator

So it's not necessarily going to go down sequentially, but we do expect to see strong operating leverage from the direct salaries line throughout the 2024.

Speaker 2

And in terms of your question and this comes from a control freak, you got to control what you can control. And what I would say is that there is a deep alignment across all partners and stakeholders, airports, airlines, the government, most importantly passengers that they want safer and easier experiences, that technology is the solution, that bringing PreCheck to as many people as possible, which is great from a physical screening perspective, that biometrics are going mainstream and that public private partnerships are powerful. And so it's everybody working together and an alignment around that that I think does drive timing and that everybody wants this to happen, right? Again, I keep going back and I think everyone sees it. There's a 1,000,000 more travelers coming through airports every single day by 2,030 and we're in 2024, so it's just not that far away.

Speaker 2

You've got to be rolling out these technologies. And so I think the alignment helps ensure the outcomes.

Speaker 1

Thank you. And our next question comes from the line of David Underwood with Wells Fargo. Please proceed with your question.

Speaker 8

Hey, thanks for taking my questions. Guys, you talked about the ARPU increase, I shouldn't say increase, but mentioned average members paying less than $10 per month. So let's say it's $115 annually and we know about the pricing increases, but just wondering how we should think about ARPU pricing increases over the next couple of years? Thanks.

Speaker 2

Before Ken talks about the technicals on that, I will say when you think about the value for less than $10 a month for Clear Plus, when you think about the value for pre check less than $1.30 a month, These are incredible values when you think about the time value return as well as the challenges around travel. And I think that creates a lot of opportunity to continue to drive value for customers and when you do that over time there's pricing opportunities.

Operator

Yes. And so when we talk about the average, obviously, our retail price points $189 We have family plan for now $99 airline pricing. So there's a wide variety and our credit card partners, so those members don't pay anything. And so we will continue to evaluate opportunities as we see them. We think that we have very modest price elasticity in this business, but we also need to deliver a great customer experience and that's what we're focused on this year.

Operator

And as we deliver on that, we will evaluate opportunities to take price appropriately.

Speaker 2

And again, continue to add to either side of the experience from home to gate.

Speaker 4

Okay, thanks. And then guys, just

Speaker 1

a follow-up. So, Ken, maybe this

Speaker 8

is more for you. When we look at the full year guide and the 3% comment in the shareholder letter on travel increase for 2024,

Operator

Is there a way for us

Speaker 8

to think about member growth expectations exiting 2024 versus 2023? Thank you.

Operator

So, I would say that we manage the business for members, for bookings and for free cash flow. And so there's a lot of levers to pull here. And so what we're really focused on ultimately is driving free cash flow. And obviously, we want to grow our member base, but we want to deliver a great experience. We're going to look at pricing opportunities, as I just mentioned.

Operator

And so, there is a lot of ways to optimize the business and we're going to look at that and not going to specifically talk about what the member growth is going to be.

Speaker 2

We opened 8 airports in 2023. We expect to launch and grow the network this year. Those airports, I would call them very immature airports, maybe 20222023 openings, still have obviously incredible growth opportunities, as well as new airports and our mature airports continue to comp well. And again, when you talk about mature, you know, 2, 3 years are not necessarily mature. Obviously, 10 is more and continue to have good growth.

Speaker 2

But as Ken said, we're focused on the overall picture.

Speaker 1

Thank you. Thank you. And we have reached the end of the question and answer session. I'll now turn the call back over to Karen Steinbeck for closing remarks.

Speaker 2

Thank you for joining our Q4 2023 earnings call. I want to say a huge thank you to our team, the Clear team. I am proud of how we are growing our partners and products and executing on behalf of our members every day. Identity is foundational. It is here and now.

Speaker 2

You're seeing it in travel and beyond. So thank you for joining today.

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