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

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

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.

Travel has really become part of the vacast and there are so many drivers of it. So, we continue to be very bullish on travel and specifically for the CLEAR Plus business, people coming through airport security checkpoints. I also think, again going back to what I said to Josh of biometrics going mainstream, that travelers are showing up at airports with higher expectations. And I think you see a lot of new builds and new launches, Denver launched in new lane. You’re seeing new concessions. You’re seeing technology. That is really meeting the current customer expectations of what they have outside of airports. And I do think that the easier, the more friction-free, we can make the experience that airlines and airports can make the experience, the more you will see people travel.

Cory Carpenter: Thank you. And just a quick follow-up. Any color you’re able to provide on what the TSA enrollment in person cross rollout could look like from here now that you’re in New York and you have renewals online? Thank you.

Caryn Seidman-Becker: Oh, you mean PreCheck?

Cory Carpenter: Yes, PreCheck, sorry.

Caryn Seidman-Becker: Okay. Do you want to…?

Ken Cornick: Yes. So, the rollout plan from here is that we are going to add — we expect to add a few airports over the next coming weeks. And then roll out to the rest of the country throughout the year all subject to TSA approval.

Caryn Seidman-Becker: I will say on Newark, it’s incredibly exciting. We’ve obviously been talking about our excitement around TSA PreCheck enrollment provided by CLEAR for several years. If you go to Newark, you’ll see that we’re open seven days a week, 14 hours a day with multiple pods staffed by friendly CLEAR ambassadors. So, when you think of the capacity and the no appointment required and how this is really increasing enrollment accessibility for American travelers, the opportunity over time pending TSA approval to roll this out across the country is incredibly exciting and we are very encouraged by the early results, both online and at Newark.

Operator: Thank you. Our next question comes from the line of Ben Miller with Goldman Sachs. Please proceed with your question.

Ben Miller: Thanks for taking the questions. Maybe two if I can. First just on the retention being a little lower, it implies maybe the gross adds were better. So, any color you can share just on particular channel strength to call out either an airport or partner? And then, just on the guide, any color to quantify the impact from Easter shift on travel patterns and/or the — that’s implied in the guide? Thanks.

Ken Cornick: So, I’ll start with the guide. So generally speaking, we have a much higher backlog of retention in Q4 versus Q1. So, the sequential decline from Q4 to Q1 is totally typical. Last year we had a much larger benefit from a pricing perspective sequentially. So if you look at 2023, it was a very big year for pricing. We took price on basically every cohort. And so when you look at Q1 2023 versus Q2 — Q4 of 2022, we had the benefit of family airline channel and standard renewals. And so, if you back out that impact, you really have a much more similar sequential change from Q4 to Q1. So that’s what I would say about the guide. I don’t think — I don’t have a specific comment on Easter shift there. And then in terms of the channels, I think our teams performed extremely well in Q4, both in airport and some of the marketing channels.

You did see a sequential uptick in marketing spend. So we took some opportunities where we saw the ability to accelerate the gross adds from that perspective. So no specific channel of strength, but obviously just strong execution across the board in Q4.

Operator: Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group.

Dana Telsey: Hi, Caryn and Ken. Nice to see the progress. As you talked about the experience and the enhancements that you’re making what are you doing? What should we see as we go through the year? Obviously, speed definitely one thing, but you also mentioned the new handheld devices. When will those be rolled out? And how are you looking at it? And then just for this year overall with TSA PreCheck are there any expenses that we should be mindful of as we go through the year for the model? Thank you.

Caryn Seidman-Becker : Ken can take the PreCheck data and then I’ll talk about the technology rollout this year.

Ken Cornick: So from a PreCheck perspective, we’ve talked about I think over the last probably eight quarters that we’ve been carrying expenses overhead for PreCheck and that’s why we’re so optimistic on our high incremental margins. One of the reasons for — in 2024, we are bullish on margin expansion is because we have been carrying a lot of overhead. So the incremental expenses you’d see from PreCheck really would be around staffing and we have been carrying some extra staffing as well. So I don’t — I wouldn’t say that you’re going to see anything meaningful certainly be marketing the product as well. But we do believe that PreCheck should lead to fairly high incremental margins.

Caryn Seidman-Becker: And in terms of the technology rollout Dana that you should see this year some of which I can talk about and some of which I can’t yet talk about, you will see new pods from CLEAR that are faced first pods. We’re calling them Envy, which is a combination of enrollment and verification. And they are faster. They are slimmer so we can have more and they are face first pods. And so that’s really important from a power of the camera capture things of that nature. From there the pods transmit digital identity to these handhelds and then it is a tap to transmit those digital identities into the TSA system. And so members will be face first fairly break stride and not have to take any IDs or boarding passes out of their pockets. There will remain always randomization from a security perspective. And so those things will really contribute to not only speed and efficiency, but member experience and security.

Dana Telsey: Thank you.

Operator: Thank you. Our next question comes from the line of Mark Kelley with Stifel. Please proceed with your question.

Mark Kelley : All right. Thank you very much, and good morning. If I can just expand maybe on the last couple of points you made there Caryn on the user experience. There’s a lot that’s in your control like some of the things you just outlined some are maybe you’re more reliant on the CAT two machines and things like that rolling out. I guess what’s more important in your mind the things you can control or the things you cannot control directly? And then the second one is in terms of search staffing around the NextGen ID initiatives does that come out of the P&L starting this quarter or we can see a little bit of that do you get to 100% of folks upgrading? Thank you.

Ken Cornick: Yes. In terms of the — I’ll answer the second question first. The surge staffing we talked about in Q4 $2 million and a similar amount in Q1. And I would say that that does come out. Now of course we’re still growing our footprint right and we still have verification growth. So it’s not necessarily going to go down sequentially, but we do expect to see strong operating leverage from the direct salaries line throughout 2024.

Caryn Seidman-Becker: And in terms of your question and this comes from a control freak, you got to control what you can control. And what I would say is that there is a deep alignment across all partners and stakeholders airports, airlines, the government, most importantly passengers that they want safer and easier experiences. That technology is the solution that bringing PreCheck to as many people as possible, which is great from a physical screening perspective that biometrics are going mainstream and that public-private partnerships are powerful. And so it’s everybody working together and an alignment around that that I think does drive timing and that everybody wants this to happen, right? Again, I keep going back and I think everyone sees it.

There’s million more travelers coming through airports every single day by 2030, and we’re in 2024. So it’s just not that far away. You’ve got to be rolling out these technologies. And so, I think the alignment help ensure the outcomes.

Operator: Thank you. And our next question comes from the line of David Unger with Wells Fargo. Please proceed with your question.

Q – David Unger: Hi. Thanks for taking my questions. Guys you talked about the ARPU increase. I shouldn’t say increase but you mentioned average members paying less than $10 per month. So let’s say, it’s $150 annually and we know about the pricing increases. But just wondering, how we should think about ARPU pricing increases over the next couple of years? Thanks.

Caryn Seidman-Becker: Before Ken talks about the technicals on that I will say, when you think about the value for less than $10 a month for CLEAR Plus when you think about the value for PreCheck less than $1.30 a month, these are incredible values when you think about the time to value return as well as the challenges around travel. And I think that creates a lot of opportunity to continue to drive value for customers. And when you do that, over time there’s pricing opportunities.

Ken Cornick: Yes. And so when we talk about the average obviously, our retail price point is $1.89. We have family planned for now $99 airline pricing. So there’s a wide variety of — and our credit card partners so those members. don’t pay anything. And so we’ll continue to evaluate opportunities as we see them. We think that we have very modest price elasticity in this business. But we also need to deliver a great customer experience, and that’s what we’re focused on this year. And as we deliver on that, we will evaluate opportunities to take price appropriately.

Caryn Seidman-Becker: And again, continue to add to either side of the experience from home to gate.

Q – David Unger: Okay. Thanks. And then guys just a follow-up. So Ken, maybe this is more for you. When we look at full year guide and the 3% comment in the shareholder letter on travel increase for 2024, is there a way for us to think about member growth expectations exiting 2024 versus 2023? Thank you.

Ken Cornick: So, I would say, that we manage the business for members, for bookings and for free cash flow. And so there’s a lot of levers to pull here. And so what we’re really focused on ultimately is, driving free cash flow. And obviously, we want to grow our member base, but we want to deliver a great experience. We’re going to look at pricing opportunities as I just mentioned. And so there’s a lot of ways to optimize the business, and we’re going to look at that and not going to specifically talk about what the member growth is going to be.

Caryn Seidman-Becker: We opened eight airports in 2023. We expect to launch and grow the network this year. Those airports, I would call them very immature airports maybe 2022 and 2023 openings, still have obviously incredible growth opportunities as well as new airports. And our mature airports continue to comp well. And again, when you talk about mature two, three years are not necessarily mature. Obviously 10 is more and continue to have good growth. But as Ken said, we’re focused on the overall picture.

Q – David Unger: Thank you.

Operator: Thank you. And we have reached the end of the question-and-answer session. I’ll now turn the call back over to Caryn Seidman-Becker for closing remarks.

Caryn Seidman-Becker: Thank you for joining our fourth quarter 2023 earnings call. I want to say, a huge thank you to our team, the CLEAR team. I am proud of how we are growing our partners and products and executing on behalf of our members every day. Identity is foundational. It is here and now. You’re seeing it in travel and beyond. So thank you for joining today.

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