Clear Secure, Inc. (NYSE:YOU) Q3 2023 Earnings Call Transcript

Clear Secure, Inc. (NYSE:YOU) Q3 2023 Earnings Call Transcript November 8, 2023

Clear Secure, Inc. beats earnings expectations. Reported EPS is $0.21, expectations were $0.1.

Operator: Good morning and welcome to Clear’s Fiscal Third 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 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 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’ll turn the call over to Caryn.

Caryn Seidman-Becker: Good morning. The third quarter 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 returned to pre-pandemic norms. 40% 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. In addition, we repurchased 1.1 million shares since last quarter, increased our quarterly dividend 29% to $0.09 from $0.07 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 outstanding. 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. With Clear’s NextGen Identity, we will be the first 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. 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 2030 there will be another million 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. This quarter we expanded Minneapolis and will be adding a new and much-needed lane in Atlanta, as well as streamlining existing lanes like we did in Chicago this quarter. Expect to see additional lane expansions in the coming quarters. So far this year we have added six CLEAR Plus airports and seven 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 improved 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. Our LinkedIn partnership continues to build momentum in the US 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. We acquired Sora 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 Sora KYC 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 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. It is important that teams are easily connected top to bottom and cross functionally to ensure connectivity and alignment. We’ll 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.

Ken Cornick: 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 incremental EBITDA margins were 40%, demonstrating operating leverage across the board. This quarter we settled the accrued liability to our credit card partner for contract year two, ending on June 30, representing around $133 million of cash outflow. With this large outflow, our free cash flow was negative $9 million. Excluding the net outflow this year and last year, our free cash flow was up 150%. On a trailing 12-month basis, we generated $180 million of free cash flow, up 97% year-over-year.

Excluding the $10 million 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 flow was $123 million, up 228%. In September, we acquired Sora ID. 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 $5.25 million of which $3.75 million was paid in Q3. Further details of the deal terms are available in the 10-Q released this morning, which include retention bonuses and earnouts based on revenue targets.

Active CLEAR Plus members were 6.4 million as of September 30, up 31% year-over-year. As Caryn mentioned, we saw a return to 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. 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&D, there’s a $7.7 million benefit from stock comp reversal related to reorganization-related employee departures. On a clean basis, year-over-year R&D was down 240 basis points as a percent of revenue. Most of the R&D savings from the reorganization is already reflected in our Q3 results. G&A includes $457,000 of deal expenses related to the Sora acquisition. Clean G&A was down almost 800 basis points as a percent of revenue year-over-year. Normalized stock comp expense was $11.8 million, which is down from $14.1 million last quarter. This excludes pre-IPO performance units and reversals. In Q4, the Sora ID equity-related compensation will bring this number back up a bit.

We continue to have a sharp focus on stock 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 million of annual savings including equity compensation. The third quarter reflects a total of $4 million of benefit, split approximately $3 million in R&D and approximately $1 million in G&A. The balance of the benefit will be fully realized by first quarter 2024 and largely fall into G&A. In Q4, we expect $2.5 million of onetime cash severance expense falling $1.5 million into R&D and $1 million in G&A. Additionally, we expect R&D to grow sequentially reflecting the Sora 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 in the back end where we will add to our multifactor 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. We expect Q4 revenue of $165 million to $167 million and bookings of $185 million to $187 million. We 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&A.

Operator: [Operator Instructions] Your first question comes from Sarang Vora of Telsey. Your line is open.

See also 10 Most Promising Metaverse Stocks to Buy and 12 High Growth Forever Dividend Stocks.

Q&A Session

Sarang Vora: Hey. Thank you, guys and great quarter, great outlook. This is Sarang for Dana Telsey from Telsey Advisory Group. My first question is on the NextGen ID. It seems like a big transformation for CLEAR here. 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 1.5-year thing two year thing? And then your relationship at the back end as well with the Department of Homeland Security authentic data sources? And how you are making this NextGen 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 as well. Thank you.

Caryn Seidman-Becker: Hi. Look — thanks for the question. We’ll start on the NextGen ID. So you’re right. This is a major initiative. It will be the highest fidelity digital identity at scale and unlocks physical and digital experiences for our members. So this has implications 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 multifactor authentication process with another piece of deeply authenticated data 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 airports 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 really the great unlock for the customer experience to make it so you’re not breaking strides and so then also connecting it to a face-first experience. And I think when you look at both online and off-line having a very high fidelity multifactor authenticated identity is the unlock that people have been looking for again whether you look at Sora 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-first connected experience in the lane.

Ken Cornick: 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. But it’s going to be a very light-touch process in the airport. New photos and in many cases confirming IDs 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 time frame.

Sarang Vora: That’s great. Can’t wait to try. I feel like we need a secured ID like the NextGen 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. Can you help us walk through some of the details that you might have internally prepared for TSA PreCheck 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?

Ken Cornick: 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 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.