Clear Secure, Inc. (NYSE:YOU) Q4 2023 Earnings Call Transcript February 28, 2024
Clear Secure, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to CLEAR’s Fiscal Fourth 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-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: Good morning. CLEAR’s fourth quarter and full year 2023 financial results reflect our continued focus on growth in members, bookings and free cash flow. This quarter we exceeded 20 million members on the platform an important milestone. More members joining the CLEAR platform means more value for our partners, who are focused on creating friction-free experience as their customers. In 2023, revenues grew 40% and operating margins expanded by over 1300 basis points. We generated 200 million of free cash flow. Last year we were obsessed with our members experience and in 2023, we did not consistently deliver the in-lane experience that our members have come to expect. As you read in our letter, we are fixing this.
Delivering our members to CLEAR experience they know, love and rely on. In December, we launched NextGen Identity+. And with that CLEAR is operationalizing the first and only at-scale standardized digital identity, the absolute unlock for the lane of the future. The CLEAR team is doing an amazing job with our NextGen Identity+ upgrade and is in it to win it. CLEAR leaders stand out across the country, working side by side with our ambassadors and saw firsthand the passion our members have for both CLEAR and our ambassadors as well as the excitement they have for the lane of the future. Travel continues to be strong and travelers are creating predictable journeys and innovation, exactly what CLEAR is known for. NextGen Identity+ enables the CLEAR lane of the future as series of new technologies rolling out this year to deliver the great experience that our members have come to expect from CLEAR.
Bringing TSA PreCheck enrollment provided by CLEAR to Life has been an incredible labor of love. We think every traveler should have it. It is such a great program and at $1.30 per month which is less than a cup of coffee, who doesn’t want to keep their coat and shoes on and their laptop in their bag. The key here is making enrollment easy and accessible to all travelers. We are working hand in hand with our partners to make this happen. Today, consumer experiences are one-touch and that is the customer expectation. We are focused on delivering friction free enrollment know a point necessary. Last week in Newark, we opened before sunrise and less than two minutes later our first enrollee walked right up. The team was excited to serve them and they were thrilled to enroll on the spot.
As I often say travel is hard and getting harder. And our job is to make it safer and easier for all travelers. I am proud of the work that our team has done and we cannot wait to bring this nationwide. CLEAR Verified continues to gain momentum. You cannot pick up the paper today or go online without reading about challenges that trusted identity can solve, whether it’s the need for age verification on social media, the problems caused by online anonymity, entire systems going down because of fraud or marketplaces where stolen goods are sold, a universal digital identity is the solution. In healthcare, hospital systems are finding significant value in our identity platform. Our password reset, account creation and check-in products reduce operating costs, increase conversion and delight customers.
CLEAR is uniquely positioned to become the trusted identity layer of the Internet. This year our continued focus will be on member experience, bookings growth, margin expansion and free cash flow. I will now turn it over to Ken for discussion of financials.
Ken Cornick: Thanks, Caryn. In Q4, revenue grew 33% and we maintained a long-term 30% bookings CAGR, while generating strong incremental margins. Cash flow from operations was $94.1 million and free cash flow was $90.4 million up 27% year-over-year. For the full year we generated $225 million of operating cash flow and $200 million of free cash flow up 46%. Pro forma after deducting normalized stock comp free cash flow grew 42% in the quarter and 80% for the full year. We returned $110 million of capital to shareholders in Q4 and $210 million in the full year, while shrinking our share count. Active CLEAR Plus members were 6.7 million up 23%. We have seen continued ARPU growth sequentially and year-over-year as the impact of pricing rolls into revenue.
Annualized CLEAR Plus member usage was 8.1 times down 0.5% versus last year. Mix matters. And as we’ve expanded our non-airline partner channels there is a utilization difference which is driving the decline. Airline channel members have about two times the usage of non-airline numbers. In Q4 our results include some items I want to highlight. We incurred a cash severance expense of $2.9 million related to the streamlining actions we announced last quarter. That impacted R&D by $1.5 million, G&A by $1.1 million and sales and marketing by $200,000. We expect to incur additional severance expense of $900,000 in Q1 primarily hitting R&D as we completed some additional streamlining this month. We also incurred $2.9 million of expenses related to the NextGen Identity upgrade consisting of $2 million of surge ambassador hours and $900,000 of enrollment expenses.
In Q1 we expect a similar amount of NextGen expense which will normalize by April. To put NextGen in perspective, we have already upgraded millions of members representing around 85% of our verification volume consuming 100,000 incremental labor hours since December. We should see strong operating leverage on the direct salaries line as we progress through this year. In the quarter, we also benefited from a reversal of $9.6 million of previously expensed stock comp relating to departed team members and the expiration of the pre-IPO Performance Award units. Normalized stock comp was $11.8 million down 25% year-over-year. Excluding these items our OpEx was down around 1,300 basis points as a percentage of revenue and we achieved 46% incremental operating margins.
Annual CLEAR plus net member retention was 86.3% in the quarter. We look at both member retention and dollar retention. This is particularly important in 2023 when after taking almost no pricing for the first 12 years we took significant pricing for airline family and standard members. For the airline channel specifically where we reduced the discount available to frequent flyers pricing was up between 35% and 50%. And we are pleased that given these increases we experienced only a modest impact on member retention and our dollar retention was up mid single-digits year-over-year to around 90%. Our net member retention metric is impacted by reactivations or win-back activity. Typically around two-thirds of our reactivations happen organically in the Lane with all the focus and prioritization of NextGen upgrade reactivations in the Lane are temporarily below trend.
Net member retention settling in the remains our expectation. Over the next several quarters we expect the cumulative impact of pricing member mix and NextGen will bring us below those levels before rebounding. On average CLEAR members are paying less than $10 per month which is an incredibly compelling value. We will continue to focus on member retention and dollar retention as we drive bookings and free cash flow growth. In Q1 we expect revenue of $172 million to $174 million which at the midpoint represents 31% year-over-year growth. We also expect total bookings of $178 million to $183 million which at the midpoint represents 21% year-over-year growth and a 29% long-term CAGR. Consistent with prior years Q1 bookings are down sequentially versus Q4 reflecting a larger renewal pool in Q4 versus Q1 and this year a lower sequential pricing benefit.
While guidance includes incremental PreCheck revenue keep in mind we just began online renewals in January and our first in-person enrollment location opened just last week at Newark. As new businesses like PreCheck and CLEAR Verified continue to ramp, we are widening our guidance range as they are early stage relative to CLEAR Plus as small timing differences can move bookings from one quarter to another. For the full year 2024 we expect to deliver strong revenue and total bookings growth expanding margins and free cash flow growth of at least 30%. With that let’s go to Q&A.
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Q&A Session
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Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Joshua Reilly from Needham. Please proceed with your question.
Joshua Reilly: All right. thanks for taking my questions. Nice job finishing up the year here. Maybe can start with finishing up the year here. Maybe just starting on net member retention. Can you just discuss maybe in some more detail some of the nuances in terms of the calculation since it’s based on people versus dollars and how the normalization of travel trends is impacting this figure versus the NextGen ID upgrade that you mentioned also impacting it. Maybe just give a sense of the magnitude of each of those items?
Ken Cornick: Sure. Thanks Josh. Good morning. So, a couple of things going on. One is I would just highlight that we’re focused both on the public retention metric is based on members, right? We’re also focused on dollars. As I mentioned in the opening, our dollar retention was up mid-single-digits year-over-year to around 90%. So, we’re really pleased with the performance there. The public metric as you mentioned is a trailing 12-month metric. And so the trend of growth matters there. And there’s also two components there’s gross and net. So, the gross retention is the year-over-year performance of how many members are retained. And then the difference between gross and net would be the win back activity or reactivations. About two-thirds of our reactivations happen in the Lane and we are definitely running a low trend due to the NextGen upgrade process on the reactivation piece.
And so as we cycle through the next few quarters, as we lap pricing, and as we lap mix, mix is also a factor, we had a much larger percentage of year one renewals in 2023 versus 2022. And just like every subscription business those tend to carry lower retentions than the more mature cohorts. So, as we cycle through those, it will be a more normalized rate. We expect it to be in the upper 80s over the next few quarters. And so net-net very happy with the performance there and that’s probably what I would say there.
Joshua Reilly: Got it. And then we’ve all seen the press articles on the changing competitive landscape within the security lane. How do you see the changing landscape playing out here with airlines and the TSA working to develop their own more efficient processes based on biometric data as well?
Caryn Seidman-Becker: Yes. Hi Josh, it’s Caryn. Look with one million more travelers coming through airports by 2030, technology is the most important solution for airports, for airlines, for the TSA to do the and the safer and the easier and it’s consistently been brought to the checkpoint since we started in 2010, right? There was PreCheck, AIT, CT scanners. And we always believe that biometrics were going mainstream because they make it safer and easier. So, biometrics coming to the checkpoint has been expected. And I think it’s a good thing for American travelers and for security. At CLEAR, biometrics aren’t the product, right? They are a feature. And so what we’re really focused on is about delivering an experience that is frictionless and predictable from home to gate meeting travelers where they are whether they travel once a year or once a week and you’re going to continue to see more products from us to make sure that we can deliver to all travelers.
It’s also the reason that we’ve been talking about NextGen Identity. We started talking about it publicly last quarter. But as you guys know we’ve been working on it since 2020. I would have loved to have rolled it out last year but it’s going to have a great impact on the travel experience this year. So, what we’re focused on is interoperable, universal, digital identity because travelers use multiple airports and airlines. So, no matter which airport you show up to which airline you’re flying on or your status using CLEAR’s NextGen Identity to get through quickly and predictably and then adding services on either side of the checkpoint is the unbelievable customer experience. But we expect over the next few years the entire checkpoint should be biometrics, right?
It’s safer and it’s easier. But again it’s the experience that you’re delivering off that holistically.
Operator: Thank you. Our next question comes from the line of Cory Carpenter with JPMorgan. Please proceed with your question.
Cory Carpenter: Hi. Good morning. I wanted to ask what you’re seeing with travel demand this year. We’ve heard some mixed messages from some of the travel companies. So, curious what you all are seeing and then how that is impacting your 1Q bookings outlook? Thank you.
Caryn Seidman-Becker: We continue to be very bullish on travel. I sound like a broken record since we went public, but travel and experiences continue to be a bright spot of consumer spend. Airports have been putting out their volume data for last year and it is records across the board pretty much. And then, there’s growth cities like in Austin, that are just off the charts with the kind of growth over the past few years that you really have never seen in airports. Business travel is rebounding. If I look at our business mix of verification, it was up 300 basis points year-over-year. I would say, there’s a normalization of leisure premium remains strong. But what we really focus on number of people coming through airports. So, whether it be pricing in airlines or hotels, unless it’s extreme, we really don’t see that impacting the volume that we see.
