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.

Operator: Our next question comes from the line of Paul Chung with JPMorgan. Please proceed with your question.

Paul Chung: Hi. Thanks for taking my question. Very nice quarter to finish the year, very strong cash flow. So first up now the firms at 51 airports is a long-term goal of mid-50s revised higher, which key airports are still in the pipeline in your view? And what’s the average lane per airport today and opportunities there to expand? Also any progress on international as well? You mentioned the reserve offering, which opens up a nice cross-selling channel. Can we see CLEAR Plus lanes expand or meaningfully overseas this year? And I have a follow-up.

Caryn Seidman-Becker: Thanks Paul. So yes we are at 51 airports today with the launch of Kansas City yesterday and I think it’s 140 lanes with those 51 airports. I do expect us to open — close to the same or slightly more airports this year than we did last year. We are already three airports in for the first two months of 2023. And so, I do think, if you look at — and it’s public information sort of the top 100 airports in the US, we think that there is high applicability in the 70-ish range of those airports. But I also think that there’s different products when you look at reserve and PreCheck enrollment where we could also be bringing products. So we now think of CLEAR more broadly, but we’re talking specifically in this case about CLEAR Plus airports lanes.

And then internationally, we do think that it’s very exciting to be building the relationships, the dialogue and the experience leading with the reserve product and we’re seeing success there. And then that is opening conversations about other products. And so whether or not that hit this year, it’s too soon to tell. But we do think when you look at the surge on travel and the challenges travel hard and getting harder, it is not just a US phenomenon but a global phenomenon.

Ken Cornick: Just on the unit economics of the smaller airports, in terms of number of lanes, it completely depends on the configuration of the airport. Generally speaking, a smaller airport will have fewer lanes. And the unit economics work for the small airports on a stand-alone basis and because they add to the network. So we’re able to, basically get to breakeven well under a year on those airports.

Paul Chung: Great. Thanks for that. And then just on AmEx, as we lap the initial kind of platinum enrollments, how should we think about kind of the pace of bookings growth this year? And what is your sense of penetration rates at AmEx platinum, renewal rates as well? Are they overall higher and if you could expand on other kind of key target airlines credit card companies, travel vendors you’re engaging with. I’ve noticed other channels occurred. Taxi at for sign-ups how successful we’ll have those channels being also on the partner side would be helpful. Thank you.

Ken Cornick: Lots of questions in there. Starting off with the renewal rate, which is easy. Yes, the renewal rates are quite high for our AmEx Platinum as you would expect, above 95%. In terms of the penetration of platinum, again we don’t have the denominator. But if you look at the AmEx fourth quarter, they announced $3 million net new cards added. Those are not all platinum but they are continuing to have success growing their member base. And obviously, we benefit from that. So we’re continuing to grow with them. I think that channel will grow. It’s growing — we have other channels that are growing faster. The one that you specifically asked about is on the curb, that’s just as a marketing channel for us, which is successful but it’s not material for us.

And then in terms of your other questions in terms of new partnerships, we are talking to additional airlines. We do think the partner channel is our best avenue for growth and our most efficient avenue for growth, and it’s been very successful for us. And so, more to come on that.

Paul Chung: Great. Thank you.

Operator: Our next question comes from the line of Michael Turrin with Wells Fargo. Please proceed.

David Engel: Hi. Great. This is David Engel on for Michael Turrin. Just one for me, bunch much of my questions have been asked. So you’ve talked about traffic volumes being up 30% in 2022. As we look to the 2023 planning process, can you talk about what you’re seeing thus far in 1Q with the two months in? And how that compares to pre-pandemic traffic? And then just bigger picture what longer-term historical annual traffic volumes look like in?

Caryn Seidman-Becker: I’ll talk a little bit about what we’re seeing in the first two months, which is strength. January always slows down a little bit, but versus December from a sequential basis. But I would say that, you just see continued strength record days and people out there traveling and wanting better experiences as they travel. So there has been no slowdown. I think, we started talking about being thoughtful of the economic environment probably in our third quarter earnings. And I will say, and you can see this across the industry. You know one thing. People want to travel, people love travel, and business travel has been coming back. And so I would say that, that is probably the new addition over the past few months, but you just see continued strength.

Ken Cornick: Yeah. And as far as trends versus pre-COVID levels we talked about a 32% CAGR for Q4, our guidance which excludes pre-check implies I think around a 30% CAGR from 2019 pre-COVID levels. So if you look at the midpoint. So we see continued strength as Karen mentioned.

David Engel: Great. Thank you.

Operator: And our next question comes from the line of Ananda Baruah with Loop Capital. Please proceed with your question.

Ananda Baruah: Hey, good morning, guys. Appreciate it. And thanks for taking the question. I guess Caryn going back to the conversation about sort of the airports that you’re in, what you’ve been adding and the new lanes that you’ve added. Is there any useful way you can describe to us where you guys think you are I guess like heat map wise relative to what you would consider to be optimal penetration in the US, even if the anecdotal. Does that make sense?

Caryn Seidman-Becker: Not exactly, when you say heat map wise do you mean MSAs and where people live or where they’re going or what are hot new areas in the US. Tell me what you mean by that?

Ananda Baruah: All of that, all of that, like you have the thought process. Yes, exactly. Exactly.

Caryn Seidman-Becker: Yeah. I mean, we look at enplanements. We also €“ right that’s the ultimate piece of it. And again, when you look at the top 100 after the top 60, you see a deep decrease in enplanements. All that being said, the smaller airports for us, because we’re in airports that look like that have been great for CLEAR, right? And so the economics not only of those smaller airports, but of the network are accretive and strong. So it’s not an exact science. It’s the partners who want to bring CLEAR to their travelers who are focused on innovation and passenger experience. We’re building products for all travelers, whether you travel once a year with reserve free for the consumer or once a week with CLEAR Plus. And so — and we’re trying to build more products in between.

And so I don’t have an exact answer except to say, we build strong partnerships. Kansas City opened a new airport and a new terminal yesterday. And they wanted to bring innovation and great passenger experiences to their travelers. And so we have a lot of runway. That’s a very exact and an appealing answer, I’m sure. But that’s the truth. It’s just travel is so strong and there are so many opportunities to transform the passenger experience from the parking and the rental car piece to bags, to security, to concessions and then, all the way back on the other side. So these are very early days.

Ananda Baruah: I got it. No that actually is very helpful. A lot of runway perspective a lot — it’s very helpful. And does that include, sort of some of these new airports say like a Kansas City yesterday as well as meaningful opportunity to add new lanes say, in those, kind of top 100 airports, airports may already be in?

Caryn Seidman-Becker: Yes. That is accurate. We have a great footprint today. And then, we add more lanes to that footprint. You saw that with new work. And we’re focused on that with other airports as well.

Ananda Baruah: Okay. That’s great. Its really helpful color, guys. I appreciate it. Thanks. Operator: And we have reached the end of the question-and-answer session. And I will now turn the call over to Caryn Seidman-Becker for closing remarks.

Caryn Seidman-Becker: Thank you for joining our fourth quarter 2022 earnings call. We are excited by the robust growth in CLEAR Network, I just said and welcome Kansas City, 51st Airport in the CLEAR Plus network, which launched yesterday. On the B2B side, we continue to believe powered by CLEAR is a significant opportunity for growth. Avis UHealth and WellStar are just the first of what we expect to be continued new partner announcements. We remain absolutely bullish on the surge in growth of the travel industry and estimate another one million travelers in U.S. airports by 2030. At CLEAR, we’re focused on innovation to ensure a scalable and friction-free passenger experience for all travelers, whether you travel once a year or once a week. I want to thank the CLEAR team again for the great work they did in 2022. And look forward to all that we’ll accomplish together in 2023.

Operator: And this concludes today’s conference. And you may disconnect your lines at this time. Thank you for your participation.