Clear Secure, Inc. (NYSE:YOU) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good morning and welcome to Clear’s Fiscal First Quarter 2023 Conference Call. We have with us today, Caryn Seidman-Becker, Co-Founder, Chairman and Chief Executive Officer; and Ken Cornick, 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 and on file with the SEC, including today’s shareholder letter. 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 in 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 Caryn.

Caryn Seidman-Becker: Good morning, and thank you for joining us for our first quarter 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 and anonymity is the new norm. The opposite of an anonymity is authenticated identity. 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 million US users to verify their identity on their profile using CLEAR for free. 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. 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 first quarter, over 10% of checkpoint traffic in our airports came through a CLEAR lane. Travel is hard and getting harder. 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. 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 home-to-gate 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. I want to thank the CLEAR team for their continued great work this quarter. With that, I will turn the call over to Ken.

Ken Cornick: Thanks, Caryn. The first quarter finished strong with revenue up 46% and bookings up 39%. We see continued momentum into the second quarter. CLEAR Plus bookings growth came through a variety of channels, word of mouth, in-airport sales, digital marketing and our partners. The in-airport 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. 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 2.5 million 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. If you think about the top 100 million travelers in the US, they belong to many different loyalty programs, most belong to an airline program, a car rental or a 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 second anniversary. This is a three-year deal with two one-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 1,250 basis points of operating leverage in the quarter, with total expense growth of 31% versus revenue growth of 46%. This excludes the noncash nonoperational items called out in the release. We achieved this operating leverage while opening 12 new airports and expanding four markets subsequent to Q1 ’22, 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 350 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 operating this business. Today, we spoke about our newest powered by CLEAR partners, LinkedIn and Health Gorilla. I will add that we see exciting traction 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 million, up 165%. I want to reiterate last quarter’s comment on equity-based compensation. We absolutely view this as a real expense. Free cash flow after employee and founder stock comp was $36 million, up 470%. We continue to expect full year growth in free cash flow before and after stock comp.

Total cash and marketable securities as of March 31st was $779 million and reflects approximately $6.5 million invested in share repurchase at an average price of $22.94 as well as $2.4 million used to net settle RSUs. In addition, we made a $6 million minority equity investment in landline, a company well positioned to help securely scale off-airport screening. In addition to repurchases, today, we announced a $0.20 special dividend. 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 million to $160 million 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, whether it’s share repurchase, dividends, organic growth or acquisitions, we are focused on driving long-term value. We will now go to Q&A.

Q&A Session

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

Dana Telsey: Good morning. Nice to see the progress. As you think about the soft launch of TSA in mid-2023, 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 in marketing wise that you can do to win back previously canceled members or anything you’re seeing there? And then just any adjustments that you’re seeing in the new airports being added of how that performance trends. Thank you.

Ken Cornick: Hi, Dana. Good morning. You got three in there, so that’s good.

Dana Telsey: Yeah. Thank you.

Ken Cornick: So 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. There’s a process to follow. We’re following it. And we don’t include any PreCheck revenue in the 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.

Caryn Seidman-Becker: So Dana, don’t forget that there’s two parts to the business. There’s the renewal part for the existing member base, and then there’s the new member additions and we’re excited about both. One is more digital and one would happen more in person. Your next question. The next question was on retention.

Ken Cornick: 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 back. So people just show up at the airport who — maybe their credit card didn’t charge properly. So when they come through the lane, they would just swipe their credit card and win back. That’s about two-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 expect it to wind up long term in the upper 80s. 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. 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. 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 five are at 5%.

So we think there’s a long runway for growth.

Caryn Seidman-Becker: And Dana, just to add to that, when you talk about the power of the network effect, when we open a new airport, hundreds of people show up on day one to verify, right? So those are people who already have CLEAR and wouldn’t have been able to use it in that airport. 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.

Dana Telsey: Perfect. Thank you.

Operator: Next question comes from Josh Reilly with Needham & Company. Please go ahead.

Joshua Reilly: 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. How do you maintain this kind of strong growth trajectory, even if TSA passenger growth continues to slow near term, just simply due to the tough year-over-year comps?

Ken Cornick: 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? So we have in-airport growth, which we said in the letter, is 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 and the TSA volume growth. So we think we have a lot of opportunity.

Caryn Seidman-Becker: Look, I would add to that. If you specifically look on a city like New York, New York had record first quarter. This is Port Authority data, record first quarter in travel, 33 million. That was up 1 million from pre-pandemic 2019. So you see airlines that have said capacity is still expected to be up 10% to 15% in the second half of the year. In March, we saw our highest average daily verifications. And so when you talk about that 2% penetration on average, right, in most of our airports, there is ways to go as CLEAR is still pretty new to a lot of these travelers, right? We’ve owned — there’s — I think we wrote — we talked about 1/3 of our airports are less than three 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 airports, 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 an expanded TAM. 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 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.

Joshua Reilly: Got it. And then just a follow-up on the PreCheck offering. Is there anything going on in the testing phase with the TSA that gives you more confidence around that time frame for the second half launch than maybe a quarter or two ago?

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

Joshua Reilly: Got it. And I’ll just sneak in one last final question for me. On the Amex Green Card, this is the first 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.

Ken Cornick: Thanks. So I won’t speak to any one particular portfolio within the Amex family, but we are getting a lot of questions on Amex. 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 and NPS scores for the Platinum members and in line with the rest of our base. 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 1/3 of our markets are still less than three years old, and the penetration is low, as Caryn 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. 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. 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 the 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.

David Engel: Hey, thanks very much. It’s David Engel filling in for Michael Turrin. I had a bunch of Amex, but we don’t have to keep going at Amex. So the 2Q bookings guide is pretty strong actually at the high end suggesting 30% year-on-year growth. Can you guys talk about some of the moving pieces that sustaining that pretty strong growth rate, more we’re at in the cycle? It’s above where most of us were originally modeling. So any seasonality to be mindful of there? Thank you.

Ken Cornick: I would just say, in general, our business is fairly consistent to understand, right? We have renewal of prior year revenues or 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 when we have 2.5 million 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. So there’s multiple channels to drive that growth plus the retention and plus we’ve taken a little bit of pricing.

Caryn Seidman-Becker: 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 the airports, whether it be ordering food online compared to what that experience was 10 years ago or flagging down in Uber, this is the new consumer expectation. And people are looking for that in travel. They’re looking for the home-to-gate 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. 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 or heading in and then sort of screeching to a halt with COVID, we’ve expanded our airports. We’ve added 19 now in a little less than two years. 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 adds and to partners. And you are seeing our brands 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 experience is and a brand that stands for trust and what we did with Health Path in COVID, I think it’s a testament to the vision and to the team making it happen.

David Engel: That’s all awesome. So obviously, I appreciate the special dividend. You guys don’t have a lot of cash in the balance sheet. We’re in the program, I’d love to hear and free cash flow is still boding very nice. Just bigger picture, would love to hear about the capital management philosophy. If you could share that with us. Thank you.

Ken Cornick: Sure. I think philosophically, we believe in being opportunistic. And so we want to maintain maximum flexibility. We’re opportunistic, and we’re owner-operators. So we’re aligned with shareholders in general.

David Engel: Thanks, guys.

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

Paul Chung: Hi. Thanks for taking my question. 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 million 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? And I have a follow-up.

Caryn Seidman-Becker: 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 hundreds of millions of users are core to their brand and to their future. And so it was that alignment. At some level, we always say our best form of BD or 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 hundreds of millions of LinkedIn members with verified badges on their profile and then to have reasons right or benefits for those badges. So again, InMain, key parts of job searches, someone more likely to open your request for a connection. 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 membership. 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. 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.

Paul Chung: Very cool stuff. And then secondly, can you talk about the strength of free cash flow in the quarter? Anything that call out there? So earnings continue to improve, bookings growth feeding accrued nicely. As we move through the year and think about seasonality, can we expect this kind of quarterly run rate of free cash flow that kind of builds into 2Q, payment out in 3Q and accrued and then kind of rebound in pace in 4Q. Is that the right way to kind of think about it? And then given the strong start to the year, do you think we’re on track to exceed ’22 levels? Thank you.

Ken Cornick: Yes. So from a free cash flow perspective, look, generally speaking, we’re an asset-light business. We are opening airports, but they’re cash — 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. But again, on a full year basis, given the way our business works, we have bookings which generally exceed GAAP when we’re — GAAP revenue when we’re growing, and that’s the nature of a subscription-based business.

And it flows to the bottom line and from a free cash flow perspective as we collect cash up front. So 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.

Paul Chung: Great. And then just a follow-up on the leverage. How do we think about kind of modeling seasonality, investments and kind of overall trends for 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.

Ken Cornick: Sure. Without getting into specific quarterly guidance, generally speaking, I would say G&A is the area where you see the most operating leverage. R&D is still going to be an area of investment for us, although we should demonstrate operating leverage there as well. From a cost 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 labor line, that should now grow in line with opening new airports, number one. Obviously, when we open new airports, 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 — the most in G&A and then less so in the cost of revenue, which is more of a variable.

Paul Chung: Great. Thank you.

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

Ananda Baruah: Yeah. Good morning, guys. Thanks for taking the questions here. Yes, two or three, 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 something along those lines. And I was wondering what that kind of refers to? Some context there would be great. Thanks.

Ken Cornick: Capacity growth, I don’t actually know what you’re referring to from a capacity.

Ananda Baruah: It was one of the questions around air travel. And yes, we can take it offline. It’s just a clarification about that.

Ken Cornick: From a macro perspective. Yes, we’ve seen the airlines talk about capacity growth in the back half.

Ananda Baruah: I see. Okay. Great. Super helpful. And then I guess just sticking kind of with that theme, do 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.

Caryn Seidman-Becker: My opinion is being on the road for a few conferences, both at the HIMSS conference for health care in Chicago and the Milken conference last week in L.A., 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, and I think we continue to see a return to business travel staying strong.

Ananda Baruah: Caryn, 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?

Caryn Seidman-Becker: 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 capacity going up 10% to 15%. I think both 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 a breakdown of business.

Ananda Baruah: No, that’s all super helpful context. So 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.

Ken Cornick: Yes. So that’s a great question, and we’re actually very focused on expanding our capacity. Two recent examples in Dulles, where we’ve seen a lot of growth in membership. We actually expanded to an additional PreCheck lane 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.

Caryn Seidman-Becker: And I think last quarter, we added a terminal in Newark. 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 drives 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 2030, there’s going to be another 1 million people coming through airports on top of the 2.5 million that are there today. So when we think about lane and airport of the future, there’s a lot of innovation going on.

Ananda Baruah: 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 Caryn Seidman-Becker for closing comments.

Caryn Seidman-Becker: Thank you for joining our first quarter 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 conclude today’s presentation. You may disconnect your lines at this time. Thank you for your participation.