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.

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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.

Caryn Seidman-Becker : And if I can just add to that we’re incredibly fired up here. We were born to do this right to make enrollment frictionless for consumers to be open at 4:30 or 5:00 in the morning at airports with our amazing ambassadors who are there all day ready to help members or travelers who are still there at nine or 10:00 at night. We have hundreds if not thousands of pods at today 54 airports across the country and more coming. So we are incredibly excited. TSA PreCheck is a great program. Millions of travelers are already enjoying it and we’re excited to add to our partnership with TSA and help further this program we were born to do this and we have the infrastructure in place today.

Sarang Vora: That’s great. Thank you. I’ll pass it on.

Operator: Your next question comes from Joshua Reilly with Needham. Your line is open.

Joshua Reilly : All right. Great. Thanks for taking my question. Nice job on execution here in the quarter. You announced the $20 million cost savings. Can you help us understand how much of that savings is related to spend on CLEAR Plus versus investments you’ve been making on the platform? And maybe give us some color on what guided the decision to make these cuts in terms of the timing?

Ken Cornick : Sure. So Josh, this is really about streamlining the organization removing layers making decisions faster. Growth can be really inefficient as Caryn mentioned in her opener. And as owner operators are — the onus is on us to really drive the top line, but also ensure that profitability falls to the bottom line. So, this is really across the board ferreting out inefficiencies, ferreting out bureaucracy and this is something you can expect us to do on an ongoing basis. We are really focused on costs while driving revenue. So this is really more across the board than specific to a business line.

Joshua Reilly : Got it. And then net member retention is now down to the range that you kind of previously discussed. I guess a few quick questions around retention. What type of visibility do you have now that you’ve seen the impact of the price changes to retention? And what cohorts of customers are you seeing a little bit higher churn with? Was it Delta SkyMiles or family customers or maybe those who joined post-COVID and that are now reassessing? Maybe help us understand some of the dynamics there. Thank you.

Ken Cornick : Sure. Yes. Look this is a really incredible business from a visibility perspective. We have years and years of cohort data looking at retention. As you point out, we are to the range where we’ve been saying since 2022 we would wind up coming out of COVID. And so when we look at the retention metric that we report that is sort of based on a trailing basis on the entire base. When we look cohort by cohort to your question gross retention by cohort has been really stable right? It’s actually higher now than pre-COVID levels even as we’ve increased price. And this speaks to the passion for the brand and the passion for the product. So we’ve seen a very inelastic demand for CLEAR. And so we’re really happy with where retention is and has been.

It’s been an upside surprise over the past six to eight quarters. And I would also remind you that this metric doesn’t actually give the benefit of the price increases right? This is a member-based metric. So this doesn’t actually speak to the impact on revenues from the pricing.

Joshua Reilly : Got it. Thanks guys.

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

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

Caryn Seidman-Becker : So thanks for the question. From an aviation or a travel perspective, the travel being challenged is a global phenomenon. And so launching the RESERVE lanes is a great start. And we also think that there’s opportunities for pay-per-use on the RESERVE. People want predictability and there’s many different ways to get it. So we are seeing a very strong response for RESERVE in countries from Germany to Italy. We just launched Heathrow. And so not only that but we see ways to tie it together with CLEAR Plus. And so potentially think of it as a golden ticket if you will that there’s fast lane opportunities both on your way out and on your return trip. So I think that there’s a lot of opportunities from home to gate internationally, which may or may not be biometric, right?

People want safer and easier experiences and it’s our job to deliver it to them in the best way possible. From a LinkedIn perspective, Canada and Mexico launching means that we can start to build ecosystems in those countries. But also as we’re doing more in CLEAR Verified, digital marketplaces are global and so we need to be able to serve those customers and those partners. So international we are set up for it from a privacy perspective and from an infrastructure perspective. And you won’t see us in all countries. I think we’re pretty selective but we’re going to follow our partners, right? And our partners could be an airline or our partner could be Linkedin.

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

Ken Cornick: Yes. So directionally, we’ve been investing in this program for several years with zero revenue. So incremental margins should be high.

Caryn Seidman-Becker: Like from here.

Ken Cornick: Yes. We are going to be recognizing the revenues on a net basis. So from that perspective gross margins will be very, very high. And we think that while there might be some incremental staffing at certain locations to enroll in PreCheck, generally speaking we have a fairly large infrastructure across the country in our 55 airports. And so a lot of the labor will be absorbed in the existing infrastructure, although there will be pockets of incremental where we see opportunities. But our tech infrastructure has been in place for several years.

Ben Miller: Thanks for the questions.

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

Cory Carpenter: Thank you. I wanted to ask if you could expand a bit on your plans for the Sora ID integration and then just more broadly the opportunity that you see in financial services?

Ken Cornick: Sure. So financial services is I would say the most developed and largest addressable market for identity today and it’s regulatorily driven. And the Sora acquisition is I would say small but very impactful. It opens that market up to us. So integrating Sora’s technology into our platform which is a fairly light lift it will basically integrated in the next few months, will allow us to go to market. And we’ve already have pipeline in financial services. We were unable to service that pipeline up until now. And so this is really a big unlock for us. And I would say there’s a real need within financial services to both remove friction from an onboarding perspective, but obviously fraud is a big problem as well. And the network identity, a reusable identity is sort of the perfect solution for this industry, right?

There’s significant drop off when your KYC, a new client in financial services and there’s significant upside if you can increase conversion. And so bringing the CLEAR brand and the CLEAR infrastructure go-to-market with our existing member base and having this network strategy within financial services we think is a really, really powerful combination.

Caryn Seidman-Becker: If I can just add to that. I think we were impressed by not only Sora’s strong team but their partner dashboard capabilities. And so marrying front end and back end, marrying our both identity capabilities today and then NextGen identity plus Sora’s capabilities makes it an incredibly powerful and importantly economically efficient because we already have a large user base capability for our partners. I would also just say there’s a lot of focus here at CLEAR focus on travel, focus on health care, focus on financial services. And there’s a lot of structural similarities between those industries both from a regulated environment, which also creates a sense of urgency, but our obsession with the customer experience.

And so I think this is a very exciting moment both launching new products like PreCheck, we talked about but Sora health care, expanding our travel capabilities, and leveraging that off a streamlined cost structure. And these are our sweet spots. We have a long track record in regulated industries driving customer experience and outcomes. And so there is a natural connection to both health care and financial services.

Cory Carpenter: Thank you. And just a follow-up on the NextGen Identity. What are some of the next steps or technologies you need before launching the CLEAR Lane of The Future kind of now that you have or you’re rolling out NextGen Identity? And is there any way to frame just how much this could potentially speed up the check-in process for Clear Lanes over time? Thank you.

Caryn Seidman-Becker: So, we have the capabilities today and we’ll be rolling them out. You might see some new hardware in the Lane, which we’re very excited about. But I think it’s really important to know when you think about face first and customers not breaking stride, when you think about seamlessly integrating into TSA’s hardware that it should be materially faster and scalable from where we are today. And we’re incredibly focused on that rate. We need to continue to drive our member experience forward in an at-scale way. Travel the mass and volumes are going to continue to grow. So the onus is on us to deploy this kind of technology right? So, face from fingerprint and eyes not breaking stride seamless digital integration into TSA hardware.

And so NextGen Identity and face are the unlock for that. And while I can’t give you an exact second what I can say is it’s materially faster as well as scalable because we expect volumes to grow from here going back to our 1 million more everyday theme coming in 2030 which is kind of around the corner.

Cory Carpenter: Thank you.

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

Mark Kelley: Thank you very much. Good morning everyone. I have two quick ones. Just on the NextGen Identity whatever that does completely get up and running and you’re kind of at scale there does that give you an opportunity to maybe have fewer ambassadors per terminal? Or given how fast I’m assuming the whole process will be maybe you need fewer of those folks at the airports? I guess what’s the right way to think about that? And then second just quickly on the Sora ID acquisition. And Ken maybe you just answered this by saying it will be integrated in the next couple of months. But when there’s a change of ownership do you have to go through like a requalification process given that your industry is highly regulated or is that not something that happens in your industry? Thank you.

Ken Cornick: I will take the Sora one first and put to Caryn. No, there’s no issue with change of control and licensing or anything of that nature. The system would be compliant. And so as long as the system is compliant that’s all that matters.

Caryn Seidman-Becker: And in terms of automation let’s just start by saying our ambassadors are awesome and they are doing an unbelievable job every day. But they’re doing an unbelievable job at many different things enrollment and we see many more enrollment capabilities adding new products at the airport. And so we intend to drive automation around Lane of the Future. And we believe that our ambassadors can continue to serve higher and better uses for our members for our airline and airport partners. That could be post TDC where they help with divestment. That could be new services that we start where they’re helping members navigate airports more abruptly not just the CLEAR Lane. That could be enrollment. So, we see opportunities for our ambassadors to continue to serve members.

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

Mark Kelley: Yes, that does. I appreciate the color. Thanks very much.

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

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

Ken Cornick: Yeah. So you’re correct. We’re not giving 2024 guidance. I will say our Q4 guidance if you look at we always look at CAGR because obviously coming out of COVID, you had the ups and downs. And so our CAGR has been consistently at or above 30% and even Q4 top line CAGR is still maintaining that 30%. And that’s with very little TSA PreCheck contribution, if you will. So we feel good about our prospects. We’re not giving guidance to the growth rates, but we think we have a lot of opportunity to continue to drive CLEAR Plus penetration. We’re going to be rolling out TSA PreCheck. Enrollment provided by CLEAR and as well as continuing to gain traction on the Verified side.

Caryn Seidman-Becker: I would think of it as network product and partners, right when modeling. And there’s network growth opportunity there’s product growth opportunity, there’s partner growth opportunity and still our vintage if you will in many airports, I think when we went public…

Ken Cornick: One of our airports are actually under two years old…

Caryn Seidman-Becker: Right.

Ken Cornick: …right now.

Caryn Seidman-Becker: So penetration of cities differs from Denver which we’ve been in for 13 years to an L.A. to a much newer city. And that’s before PreCheck and before Clear Verified which is really gaining traction. So it’s exciting.

David Unger: Okay. That’s great. Thanks. And then obviously you’re in a position in terms of the balance sheet. The share buyback, I just wanted to kind of dig into that Ken, like, the potential for stepping it up in 4Q given, you’ve guided for year-over-year free cash flow growth in 4Q and it was meaningful last year. So any color you could give there on share buyback and free cash flow returned to shareholders? Thank you.

Ken Cornick: Yeah. So look, we’re going to continue to be opportunistic. That’s our capital allocation philosophy. You’ve seen us do special dividends. We’ve increased our quarterly dividend. We have repurchased shares. We repurchased some this quarter already to-date. And so we’re going to continue to drive opportunistic capital return to shareholders. And we obviously increased our — we still had some authorization $38 million. We increased it to now $138 million. So you will continue to see us deploy various methods to return capital to shareholders.

David Unger: Thank you.

Operator: At this time, there are no further questions. I’d like to turn the call back over to Caryn, for any closing remarks.

Caryn Seidman-Becker: Thank you for joining our third quarter 2023 earnings call. I am proud of how the CLEAR team is executing, really proud of how the CLEAR team is executing and how we’re growing our products and our partners. As you’ve heard us say a lot, identity is foundational. It is here and now. And you’re seeing that in travel and beyond. So thank you for your time today.

Operator: This concludes today’s earnings call. You may disconnect your lines at this time. Thank you for your participation.