Clear Secure, Inc. Q2 FY2024 Earnings Call

Good morning and welcome to CLEAR's Fiscal Second Quarter 2024 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 documents the company has filed and furnished 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-Q. These items can be found on the Investor Relations section of CLEAR's website. With that, I'll turn the call over to Caryn.

Good morning, and thank you for joining our second quarter 2024 earnings call. It's been three years since our IPO and CLEAR remains focused on growing members, bookings and free cash flow. In the second quarter, we added a record 2.3 million members, reflecting growth across both CLEAR Travel and CLEAR Verified. In CLEAR Travel, we continue to build products that help our members win the day of travel from Home to Gate and back again. The lane of the future rollout is well underway improving the CLEAR Plus member experience with new technology enhancements that make verifications up to 30% faster, reducing friction for our members and our ambassadors. This quarter we will begin rolling out the next phase of our lane of the future, our FaceFirst technology. Members will verify with their face, a seamless experience that will keep them moving. Travel is hard and getting harder. In addition to improvements in the airport, we are furthering the Home to Gate journey with the introduction of CLEAR Perks, exclusive benefits curated for CLEAR Plus members from expedited passports to bag delivery and my favorite, CLEAR Scout, which is our lost item rescue service. Who hasn't lost something in the airport to have a CLEAR ambassador go find it for you is priceless. CLEAR Perks are designed to increase the predictable end-to-end seamless travel experience and deliver additional value to our members. By 2030, one million more passengers are expected to crowd America's terminals every day, putting even more strain on a system that is already overcapacity. Aging infrastructure and technology compound these challenges, especially at screening checkpoints. Since 2010, CLEAR has partnered with airports driving innovation to improve the passenger experience while sharing over $325 million of revenue with our local airport partners. Next month, CLEAR plans to announce a formal airport innovation campaign to accelerate our work around public-private partnerships and help bring the latest technology and infrastructure to American airports. As we said, we are seeing accelerated member growth this year, and our goal is to grow towards 50 million members by 2025. CLEAR Verified is fueled by this member flywheel. As we add more members, our platform becomes even more attractive to existing and new partners. With our increased scale, the percentage of members who are instant on already enrolled and can verify with one click goes way up. This frictionless experience, along with our trusted brand, creates product magic for our partners. In a recent nationwide brand study of current former and non-CLEAR members, roughly 80% of respondents agree or strongly agree that they trust and feel more secure with companies or brands that partner with CLEAR. A similar percentage also said they would find it preferable to sign into online accounts using CLEAR. Identity has never been more important and CLEAR is the market leader. I will now turn it over to Ken.

Thanks Caryn. Second quarter results demonstrate our continued focus on profitable growth. Revenues increased 25% and adjusted EBITDA grew 137%. We achieved incremental operating income and EBITDA margins of 80% and 74%, respectively. Margin drivers that we have been discussing include the ramp of recently launched airports, high incremental margins for TSA PreCheck and Verified, as well as continued cost discipline. P&L strength is translating into significant cash generation. Cash flow from operations was $114.6 million and free cash flow was $110.1 million, up 65% year-over-year. After deducting normalized stock comp, free cash flow grew 90%. Active CLEAR Plus members grew by 297,000 in the quarter, up from 78,000 in Q1, as the NextGen upgrade process is largely behind us and the in-airport sales channel improved sequentially. We continue to see member growth opportunities, particularly in our lower penetration markets where we are in the low single-digits versus high single-digits in our more penetrated markets. The experienced economy and booming travel market have helped expand CLEAR's addressable market. A broader demographic of travelers are now appreciating the value of being a CLEAR member in our frictionless Home to Gate journey. As of August 1, standard and airline pricing increased by $10, only the second time we've increased standard pricing in 14 years. Standard is now $199, with airline peers at $159 and $189. Family pricing increased $20 to $119 per year. We remain focused on driving ARPU through absolute pricing and reducing historical discounting. Last quarter we introduced CLEAR Plus gross dollar retention as a new KPI to reflect this focus. We introduced CLEAR Plus, which adds significant value to our membership. RushMyPassport and bag ship have already garnered significant traction. As Caryn mentioned, CLEAR Scout delivers a truly priceless service. If a member forgets anything in the airport, they can call us and we will dispatch one of our ambassadors to try and find it. So far we've covered everything from a laptop to a passport to an iPhone to a garment bag full of clothing in the United lounge. Our airport innovation campaign that we plan to formally announce next month is an opportunity to partner with airports to drive overall customer experience in a ROI-positive way. Our North Star is to identify projects that help our airport partners achieve their goals while also enhancing the CLEAR member experience, which can lead to growth in members and increased retention. TSA PreCheck enrollment provided by CLEAR is off to a strong start and it's live in 46 airports, up from three at the end of Q1. With several thousand pre-enrollments daily, this pipeline will convert to completed enrollments and generate revenues as travelers visit our expanding base of locations. We plan to expand locations inside and outside the airport to grow the market and drive share. We expect PreCheck to contribute incremental gross profit dollars in the near-term, while driving revenue and gross profit growth into next year. We repurchased 3.6 million shares in Q2 and an additional four million shares from Delta in July, continuing our opportunistic approach to capital allocation. Our partnership with Delta remains a true win-win. They invested in CLEAR in 2016 and continue to own 4.3 million shares. We look forward to continued innovation together to enhance the passenger experience. On a year-to-date basis, we've retired 8% of our beginning shares outstanding. Since initiating our repurchase program in 2022, we have bought back all 15 million shares issued in our IPO. In Q3, we expect revenue of $193 million to $195 million and total bookings of $220 million to $222 million, representing 21% and 15% growth, respectively. In Q3, we will make our annual repayment to our credit card partner, approximately $181 million. As a result, we will have negative free cash flow in Q3, consistent with last year. That said, we are raising our fiscal year free cash flow growth guidance to at least 40% year-over-year or $280 million. With that, let's go to Q&A.

Thank you. We will now begin the question-and-answer session. The first question comes from Joshua Reilly with Needham. Please go ahead with your question.

All right. Thanks for taking my questions and nice execution here in the quarter. So we saw a nice acceleration here in net member adds in Q2. Can you just review your philosophy on pricing and managing that around retention, as I believe now you just mentioned that you did implement another modest price increase here?

Sure. I'll start with pricing and then I'll talk a little bit about net adds. So thanks for the questions. So when we think about pricing, we look at it a few different ways. Look, this is only the second time we've raised prices on the standard membership in 14 years. Obviously, we've taken some incremental pricing on family. But from a standard perspective, this is $10 to $199. We were at $179 all the way back to 2010. In that time, we've gone from two airports to 58, from two lanes to over 160 lanes and we've added new ways to use CLEAR, such as CLEAR Mobile and Home to Gate. So in a world where travel is hard, it's getting harder. People are really valuing experiences in the experience economy and particularly within travel. I would say over the past few years, a broader demographic of travelers are now appreciating what CLEAR has to offer. And certainly, we look at cost per use; that's an important factor, but also what's the value per use of CLEAR. We think the value proposition has far outpaced the cost per use. And our experience continues to improve as Caryn mentioned, we're creating value beyond the checkpoint. So CLEAR Perks, we're really excited about. It's a great example where we think the value of the benefit exceeds the cost of membership, whether it's a discount on RushMyPassport or we recover your iPhone; the membership literally pays for itself. So we're confident that our members are getting more value than the price they're paying. And so that's sort of how we look at pricing. And from a net add perspective, you didn't ask a specific question, but yes, we did see an acceleration. Last quarter, we told you that the NextGen process was highly disruptive both from a focus from our ambassador, our field operation and from a lane flow perspective, and that we were coming out of it. Things would improve. We refocused on a balanced approach to servicing existing members and adding new members. And that's exactly what we've seen coming out of Q2. And so things have been improving literally since February. But certainly, June was impacted by NextGen, but coming out of June, we did see some nice growth there.

Got it. That's helpful. And then as we're getting past this NextGen ID upgrade process, I know you don't give guidance on net member adds, but can you just help us understand what are the factors that we should be considering in terms of net member adds in the second half of 2024, in terms of the family price increases impacting churn, and opening new airports and maybe just any other factors we should be considering on the trajectory of net member adds for the second half of the year? Thank you.

Sure. Sure. We think we have a lot of opportunity to grow members, particularly in our underpenetrated markets. I talked about the expansion of TAM and how we're appealing to a wider audience. So we really do believe that. And I think, as we have come out of NextGen, we've refocused our field. We've launched TSA PreCheck. That's something that's going on the side. Many of the same ambassadors. As that continues, certainly the field operations have gotten stabilized and improved sequentially and will continue to. And we are optimistic for the back half. Last quarter, we said that our growth rate in the back half would be higher than what was implied in the Q2 guidance, and that still remains true.

And if I can just add to that, there are a lot of points around net adds. There's retention, there's win backs, and then there's gross adds. I think on all of those channels, we have a lot of opportunities. For people who left CLEAR over the past few years, they're coming back to a much larger CLEAR, with better technology and more value with perks and other partners. So there should be opportunities to bring people back to CLEAR. And there's a larger population obviously, as we've grown. From a retention perspective, to your point, the CLEAR member experience is getting better. And again, we're offering more value and more on the way. So we expect that that number should also be getting better. And then, there's gross adds. I think we have opportunities across the board. And then in addition to that with pricing, when you look at gross dollar retention, that's also meaningful.

Great. Thanks guys.

Thanks Josh.

Thank you. The next question is from Dana Telsey with Telsey Advisory Group. Please go ahead.

Hi, Ken and Caryn, congratulations on the very nice results. A couple of things. As you think about the future, it sounds like the airport innovation campaign, which is launching next month could certainly be a driver of new member acquisition. Can you tell us a little bit about what it entails? A little more details on any of the partnerships with that and how you're gauging that? And then I have a follow-up.

Yeah. Hi, Dana, thank you. So we're really excited about the innovation campaign, because at some level we've been doing it behind closed doors airport by airport for over a decade, because it's not only the technology and the CLEAR Lane that drives the customer experience. But it's the holistic experience from the time you walk in the door, so that could be things like wayfinding, or how lanes are organized or structured. Bringing the latest technology and infrastructure to American airports can really make a difference for the customer experience holistically for that airport and in addition to that for CLEAR members and travelers. When you look at the opportunity to drive retention or gross adds through better customer experience to help our airport partners, when we talk about $325 million of revenue that we've shared with our partners, that's a 100% margin to them, right? And that is so massively important as they invest in infrastructure. You think you also see the power of public-private partnerships. You hear the government talking about infrastructure investments in airports. But sometimes there are things with faster turnaround that airports want that aren't funded that we can help with. Our North Star is to transform that passenger experience from home to gate, right? Not just where you're flying from the airport, but where you're flying through it. We think that this innovation campaign will really help travelers make it a journey to enjoy. I know that's like a bold statement with traveling, but you shouldn't endure the experience through the airport, you should enjoy it. We think it helps our airport partners. We think it helps travelers. We think it helps a CLEAR member experience. So again, I think on that metric that's gross adds, that's retention, that's attach rates. We'll be working with our partners to identify eligible projects and then we'll be coming back to you guys with more details on that as they come through over time. Taking it public, as opposed to going one-off behind closed doors, is an opportunity to make a bigger impact faster. I think with a nationwide network of over 25 million members on the CLEAR platform in aggregate with multiple products like CLEAR Mobile, CLEAR Plus, PreCheck and Plus, we really have a very strong balance sheet and travel is booming. You see the challenges in airports every single quarter; we could point out tons. I think you guys read them in the newspaper and at every cocktail party, it's people's favorite conversations. So I think there's a lot we can do over the next 12, 24 and 36 months to impact the travel experience and build stronger relationships and public-private partnerships with our airport partners. But as these projects come out, we'll share them with you guys.

Got it. And then anything about the other venues too, which you're expanding into and any updates beyond airports? And then Ken mentioned some membership opportunities in other MSAs, what's the game plan to attack those? And what's the opportunity and potential?

So Dana when you say other venues, you mean on the CLEAR Verified identity platform side?

Yes, exactly. Yes.

One that I think you would be particularly excited about is Home Depot. I think as we all know, and you specifically, fraud is a huge problem in retail. They call it shrink, but it's really just theft and fraud. Home Depot is focused on enhancing their customer experience while reducing shrink. We've partnered with them in the rental tool business to reduce fraud, and we've rolled it out across all their stores that have rental tools, which is over a thousand. They've seen great success in both the customer experience and in reducing fraud. This concept that we talked about a few years ago, that we continue to hammer on, the concept of a connected identity platform powering trusted experiences, making them safer physically and digitally, easier. Over 25% to 30% of their customer base was instant on. They're already on the platform. They have repeat customers day after day, week after week. For those folks to just be able to one click and verify and move on is such a win-win, and it's also bringing new people onto the platform that could use it at Home Depot, at LinkedIn, at WellStar, at public.com and more. Home Depot has just been a great partnership and a huge win-win, and it starts to really make you think about the art of the possible on what a challenge is. A lot of it comes back to identity, who you are and something about you. Are you a frequent shopper? You look at Costco because of their membership-based business; their shrink is a lot lower. So it really does talk to the power of identity.

And then on your addressable market question. Look, we really look at MSA penetration by market, and we've talked about this in the past. We have a range of airports that have been opened since 2010 to 2012 where we have a higher penetration. If we apply those penetration rates to the lower penetrated markets, that implies significant growth in the CLEAR Plus member base. It's really a matter of focus. It can be incremental staffing and enrollments within those airports or targeted marketing. So there are a range of opportunities to reach those travelers.

Thank you.

Thank you. The next question is from Ben Miller with Goldman Sachs. Please go ahead.

Thanks for taking the questions. I guess first, just any updated learnings from the TSA PreCheck rollout would be helpful, and how we should think about that as a contributor to the second half in 2025. And then Caryn, I think you mentioned a goal of 50 million members. When should investors expect CLEAR Verify to start being a meaningful driver of revenue going forward? And what are some of the more exciting CLEAR Verified offerings that you're excited about as a contributor moving forward? Thanks.

Just to clarify, I mentioned that we are targeting 50 million members as we progress towards that goal. It's important to note that we've experienced significant growth with PreCheck, expanding from three airport locations to 46. While there are multiple locations at major airports like San Francisco and LAX, we have to consider the operational capacity during our extended hours of 4:00 a.m. to 10 or 11 p.m. Average enrollment takes about eight to ten minutes, with pre-enrollment being much quicker. We've learned a lot about the benefits of pre-enrollment and digital marketing, as it effectively halves the enrollment time when individuals bring their passports, making the process more efficient. Our aim is to provide a seamless enrollment experience, which enhances customer satisfaction. As we increase our locations, we provide more opportunities for individuals to complete their enrollment. We believe the total addressable market is around $90 million, as there is strong interest in PreCheck. The monthly membership cost is just $1.30 when considering the annual fee spread over five years, but many are unaware of this, mistakenly thinking it's a larger upfront annual expense. It's essential that everyone considers enrolling. We're optimistic about our capacity to tap into this market over the coming years as we improve the enrollment process and educate potential members about our pricing. Turning to CLEAR Verified, we're very optimistic about the healthcare sector. The demand for safe and seamless experiences in healthcare for patients and providers is vast. Just like Home Depot's unexpected evolution into a connected identity platform, healthcare presents similar opportunities for improving business operations and enhancing revenues. However, transitioning from analog to interoperable systems is a challenge, and ongoing regulations in healthcare are pushing insurance companies and hospitals to address these issues urgently. Our enthusiasm extends to financial services as well, which can involve gaming, banking, or platforms like public.com. Following our acquisition of Sora nearly a year ago, we have made significant advancements on both the consumer and partner sides. We've observed substantial opportunities to enhance safety and customer experience in various sectors. There's a growing focus on online safety and trust, reflected in new verification requirements emerging from legislation. Numerous platforms are increasingly requesting user verification, highlighting the need for our services. There are ample opportunities in both consumer and travel markets, especially regarding trust and safety within shared economies. Our efforts in mobile check-ins at hotels also reflect this trend. Overall, as we scale our platform, expanding our user base will lead to more frictionless experiences for our customers. The recognition of our brand encourages consumer engagement and trust, making it crucial to continuously enhance our capabilities. We are thrilled about the increasing number of users we've added recently. I hope this provides clarity on your question.

Thank you. The next question is from Cory Carpenter with JPMorgan. Please go ahead.

Hey. Thanks. Good morning. Ken, could you expand on the drivers of the booking acceleration in Q3? And are these trends that you expect to continue into Q4? And then second question on TSA PreCheck. As we think about the initial cohort of customers signing up, any rough breakdown you can provide between existing CLEAR customers adding TSA versus customers entirely new to CLEAR and what the update for those customers has been for the bundled option? Thank you.

Sure. I'll start with the drivers. Look, it goes back to what we said last quarter. We were impacted by NextGen. That was disruptive to specifically the airport channel. If we look at the back half, there are a number of drivers that are tailwinds. Number one, obviously, pricing is a tailwind. Starting August 1, we have pricing impact, which drives both retention and new. We have an improvement in the airport channel, which we've already seen some in Q2 but that will continue. We have incremental PreCheck contribution. We said last quarter we think verified bookings would be up in the back half versus the first half. Numerous drivers are present for the bookings acceleration compared to the Q2 numbers. In terms of the PreCheck, I don't have the specific breakdown, but we're having success both marketing to existing CLEAR Plus members to add on PreCheck and completely new people coming to PreCheck that are not in CLEAR Plus. It's really spread across both sides. Certainly, our CLEAR Plus members are easier to talk to. We know who they are; we can email them. The non-CLEAR Plus members were having to reach whether in the airport with signage or with digital marketing.

Great. Thank you.

Hello?

Operator? Next question.

Thank you. The next question is from Mark Kelley with Stifel. Please go ahead.

Great. Thank you. Good morning, everyone. I kind of want to build on Cory's question on the TSA PreCheck product. I guess over the long run, do you see that being more of a factor on your revenue and margin profile overall? Or I guess what's more important: TSA in isolation or TSA as an acquisition channel for CLEAR Plus? That's my first one. And the second one is, your footprint within our airports is already quite large, but some airports you don't have access to every terminal. I guess, a, do you think you need access to every terminal? And b, how do you go about attacking those terminals where you don't have access today? Thank you.

Sure. So I'll start with the TSA. Look, we're really excited about TSA as a standalone business and a standalone revenue line item. Remember, we recognize the revenues on a net basis, so they're less impactful to our revenue or bookings. Bookings and revenue for TSA PreCheck are one and the same, right? But they are much more impactful to gross profit dollars. In the near-term, call it 2024, it's going to be incremental gross profit dollars. As we look to 2025, it's going to be meaningful to both revenue bookings and the gross profit dollar growth. I'd say the same for CLEAR Verified. We have this cost structure already in place, which we've talked about. As we enroll more people and get towards 50 million, the repeat usage drives margin as well. There are upsell opportunities and opportunities to grow CLEAR Plus as a channel, but on a standalone basis, we are very, very excited about it.

I think there's another point there, which is tiering. So you should think about it like some people might just want PreCheck, right? You might want an entry level. They might want PreCheck plus certain perks that we might add for that. They might want the bundle. As we continue to innovate, we think there's opportunities to meet different travelers where they are because certainly everyone wants a more frictionless and predictable travel experience. In terms of the terminals, we know every airline wants to bring PreCheck to their customers in a really accessible way. It's just been too hard. All airlines and all airports want to bring it to their customers. We expect to be in those terminals because they want to serve their travelers. But also, it's about meeting travelers where they are. If you enrolled online and you can finish at Staples or another retail location on a Saturday morning, because you're not going to the airport for a few weeks, or you could do it in a hotel lobby conveniently located in Midtown Manhattan during lunch. We just did a corporate enrollment, and that was met with great success. Companies would want to make it easy for their travelers to enroll in PreCheck in the lobby.

In terms of our footprint, there are additional opportunities in existing airports for expansion. We view this as a chance to grow our total addressable market. We consider whether a terminal expansion increases our market or not. Some checkpoints serve multiple terminals, which does not contribute to market growth. Previously, we discussed our CLEAR Mobile product in Louisville, which enables us to operate in smaller or seasonal airports, along with providing CLEAR Plus benefits. CLEAR Plus members can access those lanes. This also operates on a pay-per-use model, generating additional revenue. We can offer PreCheck in these smaller airports where it might not have been cost-effective to do so otherwise.

When you look at some of our smaller airports today, early days they're enrolling an impressive number of people in PreCheck. It's really important to bring this nationwide to all travelers in an easy and accessible way. It's just been great to see the positive response that we have from all the markets.

Thank you.

Thank you. The next question is from Michael Turrin with Wells Fargo. Please go ahead.

Hey, thanks for taking my question. David Unger on for Michael Turrin today. Ken, you've been increasing the share buyback amount and you've taken on more ownership of the Delta sale yesterday. Can you talk through from a high level how you think about buyback today, given you have increased confidence in the free cash flow growth that you laid out in the shareholder letter? That could be viewed as a positive given that we're in a volatile market? Thank you.

Yes. Look, we talk about capital allocation that we're going to be opportunistic. Certainly, we've been more aggressive on share repurchase this year than in past years. That's a function of where our view of free cash flow is and where it's going. Obviously, we want to drive free cash flow per share ultimately. Right now, with our guidance of at least $280 million of free cash flow this year, we have about 139 million and change shares outstanding. That's $2 of free cash flow per share. We're going to remain opportunistic and ultimately do what's best for shareholders.

Thank you. And then just one follow-up on retention. I don't know if we touched upon this in the past, but is there a soft target for the dollar retention you have? Is there a way for us to think about the bridge between the dollar member retention and dollar retention and that trend over time? Thank you.

There's no soft target specifically. We'd like it to be well over 100%.

More the better.

The bridge really is what's the year-over-year incremental benefit from pricing. The two metrics that we have today, which are the dollar and the net member, we talked about the net member and how it doesn't necessarily represent the year-over-year change because it's a lagging indicator. It is true that our member retention right now is very stable on a year-over-year basis, down less than 100 basis points on a year-over-year basis. If you remove the impact of win backs and look at an apples-to-apples cohort. Certainly, as the pricing rolls through from August 1, that's going to benefit our net dollar retention. Remember that's a 12-month trailing basis, so it's cumulative. But on the other hand, we anniversaried the airline pricing in February. So there's always pushes and pulls.

If I can just add to that, we operate in friction-filled worlds, whether it be an airport or a hospital or verifying online for certain use cases. Bringing frictionless experiences, bringing product magic that drives everything. That is what we're focused on, whether it be lane of the future, whether it be hospital check-in or hotel check-in or changing a retailer's experience so that less is behind glass and it's safer. We expect that to drive not only customer experience, but also retention and partners, ultimately flowing through to the bottom line.

Thank you both.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back to Caryn Seidman-Becker for closing remarks.

Thank you for joining our second quarter 2024 earnings call. I am very proud of our team and how they are executing across our focus areas as we continue to improve the member experience, scale TSA PreCheck, and scale verified. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.