Clear Secure, Inc. Q1 FY2022 Earnings Call

Good morning and welcome to the Clear First Quarter 2022 Earnings Conference Call. We have with us here, Ms. Caryn Seidman-Becker, Co-Founder, Chairman and Chief Executive Officer; Ken Cornick, Co-Founder, President and Chief Financial Officer. Please be advised that today's conference is being recorded. I would also like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from those projections in our most recent SEC filings. In addition, we've included some non-GAAP financial measures in our discussion. Reconciliation to the most directly comparable GAAP financial measures can be found in today's 8-K. With that, I'll turn the call over to Caryn Seidman-Becker, Co-Founder, Chairman and Chief Executive Officer of Clear. Caryn?

Thank you and good morning. Welcome to our first quarter 2022 earnings call. At Clear, we love travel and we love airports. The strong pent-up demand for travel we discussed last quarter is translating into action. As pandemic restrictions recede and people hit the road, consumers are spending a larger share of their wallet on travel experiences. There is a resurgence across the entire industry from airlines to hotels to car rentals. We have seen this firsthand at Clear in airports across the country. This March featured our highest verifications and enrollments to date. When we compare the numbers to 2019, we find the vast majority of our airports have already exceeded pre-pandemic levels. These numbers do not even take into account the full return of the traditional road warrior business traveler or international travelers. Some of Clear's earliest and largest markets are the ones that are growing the fastest. Our Clear Plus member base has more than doubled versus 2019 and a number of those earliest markets saw in-airport enrollments grow by over 300% versus the first quarter of 2019. Our trial conversion rates are at record levels and more members are utilizing the family plan than ever before. The power of the network is evident. You see it in record-high new joins, trial conversions, and family attach rates. We have built Clear to meet this moment with a growing network and new product launches. In the last month, we have opened new Clear Plus lanes at three California airports: San Diego, Ontario, and Palm Springs. These openings mean we now have over 120 Clear Plus lanes in 43 airports across the U.S. We will continue our efforts to expand this network. Network expansion is important as it drives growth in the new market and lifts existing markets, both from a gross add and retention perspective. Our Reserve powered by Clear product is providing a predictable experience for a different type of traveler. We are seeing record numbers of travelers using Reserve powered by Clear to book time slots for TSA screening in advance in cities like Phoenix, Seattle, L.A., Orlando, Newark, and Calgary. As people come to expect technologies designed to make their lives easier, more travelers are utilizing Clear's free Home to Gate tool to tell them exactly when to leave for their flight and even reserve an Uber ride ahead of time. We're excited about the platform side of our business, and after a very successful fourth quarter, we continue to sign new partnerships and build our product and partner pipelines. As it's still in its early days, the platform metrics can appear lumpy with timing mismatches between new deals signed and bookings versus enrollments and utilization. With domestic travel back and physical and digital identity more important to trust and experiences than ever before, it is an exciting time at Clear. Our free cash flow, coupled with cash on the balance sheet, puts Clear in a strong position with great long-term growth and significant capital allocation opportunities. With that, I'll turn it over to Ken.

Thanks, Caryn. Good morning, everyone. Our financial performance in Q1 was better than we expected, with revenue up 79% and bookings up 74%, driven by growth in Clear Plus as well as new deals on the platform side. As we discussed last quarter, our focus remains on growing members, bookings, and free cash flow. We generated roughly $20 million of free cash flow in the quarter and expect this to be our fifth consecutive year of free cash flow generation. Our business model is strong, and following several years of platform investments as well as the normalization of airport staffing levels post-pandemic, we are seeing operating leverage. Adjusted EBITDA this quarter was roughly breakeven. As we told you last quarter, we expect moderating year-over-year expense growth in 2022. A quick word on retention: we reported 95.3% net member retention in the quarter, which remains above our long-term expectations of the upper 80s. We are really pleased with how retention has trended coming out of the pandemic, and there are structural reasons for the strength like network expansion, strong operational execution, customer centricity, and brand passion, as we discussed in our letter. In addition, some of the strength also relates to win-backs of the excess churn we saw during the pandemic. As a reminder, the net retention calculation is the sum of gross retention plus win-backs. So in other words, gross retention which is in the low to mid-80s is netting to the mid-90s with the benefit of win-backs. We do expect net retention to normalize above pre-pandemic levels in the upper 80s and among best-in-class consumer subscription metrics. Some of you may have seen news of our planned price increase. Later this week, we are raising the retail price of Clear Plus subscription for the first time in our history by $10 to $189 for new members. Existing members will be grandfathered at $179 in 2022. This quarter, we added some disclosure around stock-based compensation expense. As owner-operators, we are strong believers in driving economic returns and we are mindful of the true cost to shareholders of share count growth. At Clear, we have constructed a thoughtful, long-term total rewards program that encourages an ownership mentality while we remain focused on limiting dilution over time. Along those lines, today, we announced a $100 million share repurchase program. As Clear owners, we're focused on economic capital allocation to maximize long-term returns, including opportunistic share repurchases. Our cash and equivalents balance at 3/31 was $663 million. Thus, we have ample liquidity to support repurchases as well as our growth initiatives, both organic and inorganic. Now for guidance: in Q2, we expect GAAP revenues of $99 million to $101 million and total bookings of $110 million to $114 million, excluding any contribution from TSA PreCheck. We're making steady progress in our launch timeline, setting us up for go-live in the next several months. We'll now go to Q&A.

Our first question is from Paul Chung with JPMorgan.

Very nice performance here. So just curious on the Health Pass member on the conversion to Clear Plus. How effective has that upsell progressed? What are some metrics you can share? And then separately, we're also seeing the Clear brand kind of pop up in various different verticals, seeing it in hospitals and others. Where are you seeing more opportunities to kind of grow the brand, etcetera?

So thanks, Paul. We are seeing organic upgrades from the platform to the Clear Plus side of the business. Interestingly, we really haven't kick-started any internal initiatives around that, so it's really organic. And I think that's incredibly exciting because it also introduces the brand to people in new ways, which makes it much easier at the airport for them to join. We're also hearing that from our ambassadors that we have much higher brand awareness which gets people more interested and excited about the brand. We're seeing the desire for frictionless experiences in multiple verticals. And I don't think it's just about the experience, right? So yes, that's the expectation for people coming out of the pandemic but also automation, which drives cost efficiencies for partners, is a driver and also connected experiences. So we are seeing it broadly based in the travel industry. So as I talked about that return, airports, airlines, hotels, car rentals, ride shares, you're seeing that desire across all of those and they also have a lot of partnerships between them. And so I think it's a holistic view there. To your point, maybe you experienced Clear at HSS here in New York City. We are seeing a lot of...

Yes.

Oh, is that where you saw it?

Yes, yes. I did see that there, yes.

Yes, well, hopefully, you're feeling okay. We are seeing interest in the health care side because, again, Clear plays on both the physical and the digital side, right? So both on the digital front door, telehealth, telemedicine as well as the physical experience. And then, the last thing I would say is we are seeing interest from, I would call it, digital trust. We did buy Atlas Certified at the very end of the fourth quarter, and this concept of knowing you and that you are certified or licensed for certain use cases, right, or jobs is also really important. So I would say it's broad-based, both online and offline. The last piece I would add is as Clear builds a lot of partnerships to help employees and employers return to work, and obviously, that's incredibly important right now, thinking about that hybrid work environment, which is now both physical and digital, we think there's a lot of opportunities there.

Right. And then a follow-up. On the airport count, you mentioned 43 today. How many lanes per airport today? Is there more runway to kind of add more lanes with your existing partners? And then looking ahead, nice progress with three airports today in the quarter. What are some key partners you see in the pipeline? Any updates on the international efforts as well?

So we do see growth on both the new airport and current airport pipeline. And so you will see both of those coming throughout this year. In terms of where we see the opportunities, we don't announce partnerships before we sign them, so stay tuned. And international, as I mentioned, we now have our Reserve lane in Calgary. Where we're focused internationally is, I would call it, the Americas, from Canada to South America, Western Europe as really our first focus, and that's in multiple different kinds of products. When I think about good, better, best and I think we talked about this last quarter, right, we have Reserve, we'll be launching PreCheck enrollment, we have Clear Plus and more products coming. So we have more opportunities to launch different products in different airports and really serve our partners as they want to be served.

The next question comes from the line of Dana Telsey with Telsey Group.

Congratulations on the nice progress. As you think about the TSA PreCheck launch, how is that going? And any update on the cadence there? And then on the B2B model that you just mentioned, any other guideposts that we should be watching for as you go through the year? And lastly, with the operating expense leverage that you had this quarter, how are you thinking about expenses going forward and the different buckets?

So Dana, I'll address the B2B aspect, and then I'll let Ken discuss PreCheck, as well as expenses and operating leverage. As I mentioned earlier, B2B is an earlier-stage business. There can be discrepancies between new deals signed and bookings compared to enrollment utilization. For instance, this quarter, we secured a significant platform deal that contributed to bookings but hasn't launched yet, so it hasn't impacted members and utilization. In contrast, with our Clear Plus business, when you enroll, you typically pay in the same quarter. Additionally, in Q4, we successfully attracted new members through our Raiders partnerships, but since the NFL season ended, we didn't see gross additions or utilization from that partnership this quarter. The key indicators to focus on are product launches and partner announcements. Some partners will have ongoing activities throughout the year, while others may only engage during a specific quarter or event. This can create some variability, so stay tuned for updates on our products and partnerships.

Dana, so on the PreCheck piece, look, we're making really good progress. Everyone involved is motivated to bring this to the traveling public. Everyone wants a larger PreCheck enrollment base. And so we continue to work in partnership with the TSA to bring our strong networking capabilities to the PreCheck enrollment program as soon as possible. And look, we're confident that we're well positioned to launch in the next several months, so I'll leave it at that.

I recently met with some of our engineers who were showcasing the product demonstration, and we're very excited to launch it. Our airport partners are also looking forward to this launch, as it allows us to utilize our strategically placed enrollment locations and our dedicated team of ambassadors across the country. We will be ready to assist travelers from 4:30 in the morning until 10 or 11:00, depending on when specific lanes or enrollment areas close. Our partners are fully on board with this initiative.

So your last question on expenses, look, I'll reiterate what we said last time which is we expect a moderating growth rate in the year-over-year expenses. As you know, we've had a couple of years of investment in the platform. Last year, we spent the year normalizing our staffing levels to pre-pandemic levels after cutting them in 2020. And so we're well positioned for operating leverage. And again, I'll point to our free cash flow generation. So our GAAP metrics understate the true profitability of the business.

The next question comes from the line of Michael Turrin with Wells Fargo.

You got Michael Berg on for Michael Turrin. Congrats on a great quarter. I just wanted to double-click on something you touched on last quarter to see if you might have some quantitative metrics behind it again. You mentioned last quarter, same-store bookings grew 50% year-over-year. Any sort of metrics around that this quarter?

Yes, we wanted to give some additional disclosure just to help everyone understand the true growth dynamics of the business on a same-store basis as well as how widespread the growth is. Caryn made a few comments in her opening remarks. In general, we are seeing strong same-store growth. I don't have a metric for the full base for you this quarter. But we are seeing very, very widespread, strong same-store growth across our base.

Fantastic. And a quick follow-up, how would you characterize the initial integration and demand for your recent acquisitions of Atlas and Whyline?

We're really pleased with the pipeline, integration is going well, and we remain very excited about those two acquisitions and what we can do to accelerate their growth as well as how they will help us accelerate our growth.

When I discussed automation, I believe that businesses are increasingly aware of the extensive hours needed to manually verify individual credentials and licenses. In sectors like healthcare or online service platforms for various professions, the demand for compliance is significant. There is a growing recognition of automation and an understanding of the importance of integrating credentials with verified identity. Additionally, with the Clear brand, partners have experienced some enlightening moments.

Our next question comes from Brian Essex from Goldman Sachs.

I was wondering if I could touch on the price increases briefly. Maybe if you could highlight the impact of those that you anticipate those increases will have on the partners. So if you're increasing the retail price $10, what happens to airline partners that offer discounted membership as well as the Amex relationship? And then I have a follow-up.

Sure. In the past, we have raised those prices, but currently, we do not have any immediate plans to do so. However, we will definitely consider it in the long term, as we have done in the past. For instance, when we initially launched Delta, the prices were $79 and $99, which have since increased to $109 and $119. As for American Express, it will continue to be fully covered for the consumer.

Got it. So is it fair to say that you're the one that decides what pricing point to set there? And particularly with regard to Amex to the economics, is that a renegotiation that happens on the part of the two parties?

No, it's not a renegotiation. When we signed the deal, all these things were considered.

Got it, that's super helpful. And then maybe just on the bookings, is there any impact to bookings? Is the net member retention still relatively analogous to net revenue retention? And any impact to that number from, I guess, true-up from pricing on renewals that may previously have been discounted during the pandemic?

The pandemic discounts have mostly been phased out. As we mentioned, we will not increase prices for existing members this year. However, in the future, if we do raise prices, you would see dollar retention outpace net member retention due to the price increase, if that makes sense.

Our next question is from the line of Ananda Baruah with Loop Capital.

Congratulations on another quarter of strong results. It's really great to see it. I have a few questions. Do you have a sense or can you comment on whether the membership conversion from the platform experiences is starting to have an impact on the impressive revenue we've seen in the last couple of quarters?

I would say every dollar makes an impact. So it's been a small impact, not yet significantly material. We do think that it is an indication of what we can do as we continue to sew the platform together.

That's helpful, Caryn. And Caryn, would the same for international, your international initiatives as well to this point?

Well, if you're talking about the Whyline acquisition, there's a small impact there but again, not yet reaching the level of significant materiality. Early days there as well.

Could you provide a bit more context regarding the factors contributing to the strong same-store sales growth you have been experiencing? It would be helpful to understand any additional dynamics you see that haven't been mentioned yet, as well as your overall experience in this area.

I think it's hard to point to one thing. This is sort of almost 13 years in the making. We launched our first airport in Orlando, mind you, as Ken talked about price increases at $179 in 2010. And we talked about over 120 Clear Plus lanes today and use cases in sports stadiums or HSS or other places. And so I think the more places that Clear shows up, this concept of early product-market fit, which is really frictionless experiences and giving people back their most precious asset, and that is time with a trusted brand, I think it all sews together. I was visiting our team in Seattle a few months ago, and our ambassadors were saying that people who had used Health Pass now understood Clear and were excited to use it at the airport. I think success is a lot of little things. We have an incredible team of ambassadors. We are fully staffed today. They are welcoming travelers back. It is harder and more stressful today to travel than ever before. And I think Clear is a bastion of tranquility in a sea of stress, not only in travel but in sports and other use cases as well. And so when you look at our member growth which is up more than 100% year-over-year and then the airport side up double over 2019, I think it's the power of the network. I think it's the trust in the brand. I think it's the word of mouth. I think it's the multiple use cases. I think it's that we've been at this for a long time. And so there's a familiarity and maybe you didn't enroll a few years ago, but you still see it today. Incredible, people talk about our ambassadors being just incredible and the greatest part of the airport. I think the technology has gotten better. The platform is stronger, faster, iris touchless, I could keep going. It's so many little things that add up to the opportunities that we have. And then it's the world that we live in. And again, I think we were probably early in 2010, but the desire for frictionless experiences and a trusted brand, which is why we wrote the letter that we did on both the privacy side and the customer experience. It's a here and now opportunity for Clear. And I would also say we have an incredible team across the country and now around the world bringing it to life.

And just one last quick one for Ken. Ken, is there any chance that the net retention can settle in kind of stronger than what your target is?

The net retention, you ask?

Yes, exactly.

Well, we do expect it to settle in above pre-pandemic levels and we're seeing that. So I said upper 80s, and that is above pre-pandemic levels and among...

Look, we're going to work really hard to make sure it's as high as possible.

We always want to maximize every KPI.

Thank you. We've reached the end of our question-and-answer session. And this will also conclude today's conference call. Thank you for your participation and have a wonderful day.

Thank you.

Thank you. Bye.