Clear Secure, Inc. (NYSE:YOU) Q4 2022 Earnings Call Transcript

Clear Secure, Inc. (NYSE:YOU) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good morning and welcome to CLEAR’s Fiscal Fourth Quarter and Full Year 2022 Conference Call. We have with us today Ms. 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-K. 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: Hello. Thank you and welcome to our fourth quarter 2022 earnings call. Fourth quarter earnings capped off a strong year of growth at CLEAR. People’s desire to travel last year surpassed even our most bullish expectations. Domestic checkpoint volumes were up 30% in 2022. At the same time, travel infrastructure proved to be far more fragile than anyone could have imagined. Travel is hard and getting harder. CLEAR’s mission, platform, and products are a critical part of the solution to make travel safer and easier. It was important we were staffed and ready to help travelers as they return to the sky and CLEAR’s reputation as a great place to build a career attracts top talent to serve these travelers. On a sequential basis, we added 8.5% to our Ambassador Workforce across airports nationwide as we saw opportunities to enhance service and grow our member base.

As our members know the CLEAR Ambassador is a bright spot in what can be a stressful time. They are ready and waiting to welcome you at 4:30 in the morning on a busy travel day or 10 P.M. ahead of your red eye. That’s why we shared in our letter some great stories about our airport team who bring CLEAR’s technology to life. The team has been busy preparing for launches of new airports as we continue to expand the CLEAR network nationwide. We also received our authority to operate TSA pre-check enrollment provided by CLEAR in late December after a rigorous review and we look forward to rolling it out to the American public in early 2023. The pace and strength of our launches materially accelerated during 2022. We have built a strong operations team and the muscle to quickly and efficiently grow into new geographies.

In the past eight months alone we have launched 15 new markets for CLEAR Plus and Reserves both domestically and internationally including our 51st airport in Kansas City this week. Strong travel demand coupled with last year’s travel challenges further our sense of urgency for innovation and collaboration on behalf of the American traveler. There is a new saying in travel, Every day is now the Wednesday before Thanksgiving. And as an industry we have to work together to prepare for that. An outstanding example of terrific collaboration with Super Bowl weekend in Phoenix. The Phoenix Airport, local TSA, and the Phoenix CLEAR team worked together seamlessly to process a record 84,000 passengers on the Monday following the big game. 17% of these passengers use the CLEAR lanes and our NPS score of over 70 shows our members’ delight.

When we think about how we will securely scale friction-free travel experiences, we are excited about our alignment with our airline partners. In January, we renewed our multiyear partnership with United Airlines exemplifying the power of collaborative innovation. Together, we are focused on bringing new technology to enable friction-free travel experiences to United travelers. You have heard us say many times that identity is foundational in travel and beyond and you see that coming to life across so many industries today. For example, the consumerization of healthcare is quickly becoming a reality with the implementation of the Cures Act empowering people to access and control their healthcare data. With our vertically integrated identity platform and over 15 million Instant-on members healthcare partners are looking to CLEAR to enable more friction-free experiences for both their patients and employees.

We have built an at-scale nationwide network in a regulated environment, which positions us well to play an important role in healthcare. Our new partnership with UHealth and WellStar are just the first two examples of what we believe to be a large opportunity for CLEAR. As always, we remain focused on growing members, bookings and free cash flow. I want to thank the CLEAR team who has done incredible work in 2022 continuing to make the CLEAR vision a reality. With that, I will turn the call over to Ken.

Ken Cornick: Thanks, Caryn. Our fourth quarter bookings and revenue were better than we expected driven by CLEAR Plus trends including renewal rates and new joins. Overall fourth quarter bookings growth of 37% and represents a 32% CAGR from 2019 pre-COVID levels. Of this 32% approximately two-thirds is same-store. We’re also encouraged by the traction we’re seeing in our powered by CLEAR business and continue to believe there is a large addressable market for our networked member-centric identity platform. Retention of 92% remains above our long-term expectations of the upper 80s although down slightly retention remains strong as our network expands and our value proposition grows. We remain encouraged by the overall unit economics of CLEAR Plus.

Free cash flow in the fourth quarter was $71 million and is up 177% over Q4 2021. Full year free cash flow of $137 million is up 220% year-over-year. I think it’s really important for me to call out as owner-operators we view stock comp as a real expense as we know our shareholders do. When evaluating new opportunities, we look at holistic comp including non-cash comp in our return on investment analysis. In 2022, we issued 1.47 million net new RSUs to employees representing less than 1% of beginning common shares outstanding. The vast majority of RSUs vest over three years. Free cash flow after considering employee and founder stock comp was $82 million for the full year 2022. In 2023, we expect to grow free cash flow before and after employee and founder stock comp.

We are laser focused on efficient growth and capital allocation. While it is now in vogue to talk about rightsizing headcount, we have always been methodical about our cost structure and want to highlight CLEAR strong incremental margins. In Q4, OpEx excluding United warrant expense and other unusual items grew 23% year-over-year roughly 40% of our revenue growth rate. For the fiscal year and grew 33% less than half our revenue growth rate. The United partnership renewal unlocked 534,000 warrants which vested and converted to Class A common stock in 2023. These warrants were issued in 2019 and have been reflected in our SEC filings. This quarter we recognized a total of $18.1 million in non-cash warrant expense of which $14.5 million related to this tranche and $3.5 million carried over from Q3.

We expect to recognize the final $1 million of warrant expense in Q1. In Q4, we also recognized $6.1 million of non-cash equity expense related to 617,000 performance RSUs issued to employees prior to our IPO, now deemed probable to vest in 2024. The Q4 amount includes a catch-up expense. The ongoing 2023 quarterly amount will be approximately $1.7 million. These RSUs have also been reflected in our historical SEC filings. Total cash and equivalents as of December 31 was $735 million and reflect the $38 million special dividend paid in December, as well as $5.4 million used for net settled RSUs. As we look to 2023, we are well positioned to grow members, bookings and revenue, while delivering operating leverage and free cash flow growth. Like last year, our bookings guidance implies a sequential decline from Q4 to Q1, consistent with pre-pandemic patterns.

Because CLEAR Plus builds annually, our quarterly bookings trends are dependent on the renewal backlog entering the year. As of 12/31 less than 25% of the annual renewal backlog fell in Q1. We’ll now go to Q&A.

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Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. First question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Dana Telsey: Good morning and congratulations on the nice progress in the results. When you look at all the metrics, the metrics are impressive and compelling. When you think about the enrollments which came in, I believe, up 48% to $15.4 million, how are you thinking about enrollments going forward? And is there any additional expenses that we should be mindful of to drive enrollments in this upcoming fiscal year? And then I like the entry into healthcare. How do you see the progress of penetrating the healthcare market as compared to the travel market, whether it’s in time, cost, margin — sales and margin opportunity? Thank you.

Caryn Seidman-Becker: Thanks, Dana. A few questions there. So I’ll take a few and then Ken will chime in as well. In terms of enrollment, I think, it’s a reflection of not only the CLEAR experience but travel being strong, right? It was up 30% in 2022 and our growth significantly outpaced that and Ken talked about both same-store growth as well as new stores. And I think that you will see those trends continue. A lot of our airports are still relatively early in their life, right? If you look at coming out, we launched eight new airports last year. And since COVID — or since we went public, I think we went public at 33 airports at the end of June 2021. So that’s a 50% growth in the network. So you’ll see growth in airports that have been opened quite a long time, as we’ve talked about historically, growth in new airports and then new airport growth as well.

And so, we expect those trends to continue. But I also think that you’ll be seeing growth coming out of the platform side and members. So you have to come to an airport to enroll on the platform side. You can do it either in a CLEAR app or what you’re seeing is in our partners’ apps. And so I think, you’ll see both of those trends continue in 2023. In terms of costs associated with that, I’ll let Ken talk about that, and then I’ll talk a little bit about the health care total addressable market.

Ken Cornick: Sure. In terms of the unit economics of the business, actually, you’ll see in the K, when we file that later today, our unit economics improved on a year-over-year basis. So we talk about LTV to CAC, and you’ll see that, that has actually improved in ’22 versus ’21, partly a function of cost of acquisition going down year-over-year. And as Caryn mentioned, as we have added to our network, both on the airport side and on the platform side, the network effect really drives unit economics. And so, we don’t see anything specifically in the horizon that would change the dynamics of the business.

Caryn Seidman-Becker: In terms of health care, Dana, both WellStar and Uhealth, our leading health systems in their region. So UHealth is a leading South Florida health system. WellStar is a leading Georgia health system. And when you look at the TAM of systems just like that, we think that there is over 6,000 similarly situated health systems in the US. And I think you’re seeing many signals in the marketplace that the consumerization of health care, which has been long talked about, is taking hold. And when you look at the Cures Act, which was passed several years ago, but only being implemented now, identity is foundational in order to make health information acceptable to patients. And so, really eliminating that proverbial clipboard for both patients and providers. So we think that these are very early days and if you just look at UHealth and Wellstar, there’s an enormous total addressable market out there. We sized it at over 6,000 just in the US.

Dana Telsey: Thank you.

Operator: Our next question comes from the line of Joshua Reilly with Needham & Company. Please proceed with your question.

Joshua Reilly: All right. Thanks guys. Congrats on the very impressive results here. So 2023 is likely the first year to exceed 2019 in terms of boarded passengers. As the year-over-year growth comps in ported passengers become more difficult as the year progresses, would you guys increase marketing spend or make any adjustments if demand were to be impacted? And how do you think about demand correlation overall to boarded passengers?

Ken Cornick: So, in terms of investment, we are opportunistic when it comes to capital allocation, and that includes marketing spend. We — our largest channel is in the airport channel, which is a very efficient channel. And so, the way we think about it is, we’ll be opportunistic around the opportunity to grow our member base like we were in this past quarter. We don’t necessarily see any dramatic changes to our unit economics as a function of tough comps.

Caryn Seidman-Becker: But to answer your question more specifically, I think there’s a lot of exciting things happening in 2023, and we’ve never been standard marketers, right? So, the launch of PreCheck, which we expect in 2023 and was not included in first quarter guidance is an opportunity to introduce people to different ways to experience airport security and both on a stand-alone and a bundled basis, we think there’s opportunities there. The power of the network effect has shown itself over the past 13 years and our incredible ambassadors on the floor, which we wrote about, are also a different form of what people think of as historical marketing spend. As we add more partners to the platform, it adds more members and there’s an opportunity right to upgrade people who have joined the CLEAR platform to right from B2B over to B2C.

And we saw success in that in places like when we partnered with Hawaii on Healthpath or as you see what we’re doing with Avis in the rental car space. And so there’s many on-ramps that we get excited about. And it’s not your €œhistorical€ marketing spend, which really gives our platform and our team opportunities to flex creatively to drive growth in an economically efficient way.

Joshua Reilly: Got it. And then just a follow-up on the net member retention. It was even stronger than what I would have expected here, you still talk about moderating to the upper 80% range. What are you seeing here in Q1 on net member retention for the first couple of months of the year? And how do you think about the trajectory of that movement back to the upper 80s?

Ken Cornick: Yeah. I mean, it’s definitely happening slower than we would have expected. And I think that speaks to the power of the network as we add more nodes including airports and other use cases that increases the utility. And I think that’s what’s driving the better than expected gross retention. And so we think it settles in the upper 80s, but it is absolutely happening slower than we would have anticipated.

Joshua Reilly: Great. And maybe I’ll just sneak one more in on the current expense run rate versus your long-term model, it seems like G&A is one of the still well-above where the long-term model is. How should we think about opportunity for leverage here in G&A this year? And can you just remind us what expenses are included in that line item? Thanks guys.

Ken Cornick: Sure. So G&A is — we think we’re going to get operating leverage really across the board I would say with the exception of cost of revenue share fee that should remain more stable than the other line items, but G&A certainly being the most leverageable line item. And beyond the typical things that you would expect in there such as rent and the regular overhead there are credit card fees, which are variable. Now obviously as platform becomes a larger percentage of the mix, credit card fees don’t apply to the B2B business. And so — and then mobile enrollment costs are also in their variable mobile enrollment cost. So there are a few things that are variable, but it’s largely more overhead type of things. And if you just look this quarter on a clean basis if you strip out some of the unusuals, you had probably around 2,000 basis points of operating leverage in Q4 last year to Q4 this year just on the G&A line item. So we see a lot of opportunity there.

Joshua Reilly: Great. That’s what I expected. Thanks guys.