Q3 2022 Clear Secure Inc Earnings Call

Good morning, and welcome to clear quarter, three 2022 earnings conference call.

We have with US here in miscarriage Seidman Becker co founder Chairman and Chief Executive Officer, Ken coordinate 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 expected.

You can find factors that cause the company's actual results to differ materially from these projections in our most recent SEC filings. In addition, we've included some non-GAAP financial measures in our discussion reconciliations 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 Kevin.

Becker co founder Chairman and Chief Executive Officer of cleaner Karen.

Hello.

You and welcome to our third quarter 2022 earnings call. Our third quarter was strong clears beloved frictionless experiences, we're more important than ever as travelers look to clear to navigate an extraordinarily challenging travel season.

Our platform expansion to enterprise partners with our powered bikes ear products suite contributed to our results this quarter.

New York, plus experienced robust enrollment and verification trends.

Same store in airport enrollments were up 65% year over year, which represents a CAGR from 2019 pre COVID-19 levels of 26%.

In addition over half of the year plus members verified in the quarter visited multiple locations, which further demonstrates the power of the clear network.

In recent years, we have seen an expanded total addressable market for more predictable and friction free travel experiences.

Here, we want to serve all travelers and are creating products for people, who travel one time per year to one time per week.

In addition to our 46 year plus airports as we welcomed San Juan Puerto Rico to our network today, we now operate 14 reserve lanes, including recent launches in Canada, Germany, and the Netherlands Reserve is free to travelers, where they can make a reservation for airport security just as they do for a restaurant.

Sure.

Well always thoughtful about extrapolating recent trends, we have seen several data points, indicating that there has been a structural shift in demand for travel where the lines between business and leisure have been blurred between hybrid work patterns. The shift in the experience economy and increase capacity created by the global shared rental market.

We believe the secular demand for travel has shifted up into the right.

In this morning's earnings release, we thought it was important to share our original catch slide from 2010, which stated clearest vision to start in travel and grow into the pre eminent identity platform obsessed with the customer experience. We believe in the power of platform and have built a clear identity platform to be interoperable.

In our view this is an important part of being obsessed with the customer experience as it allows consumers to enroll one and affirm their identity anywhere.

Powered by clear allows our partners to deliver a friction free experiences to their customers driving adoption with our over 14 million members and easy enrollment for new users. This ability to connect you to all the things that make you you is the here and now a moment the friction free future needs ramped up in 2000.

Chat is now the expectation we remain thoughtful of the economic environment, yet we continue to believe the demand for experiences including travel will sustain we also believe that identity is foundational and our growing network in travel and beyond enables safer easier.

And more economically efficient experiences both physically and digitally it's early days for the deployment of these technologies, we remain focused on growing members bookings and free cash flow as clear has demonstrated historically, we are a nimble business model and can rapidly adjust to changing market conditions.

As necessary.

Wanted to thank the amazing clear team, who have done incredible work to continue to bring the clear vision to reality with that I'll turn the call over to Ken.

Thanks, Karen and good morning, everyone, our third quarter financial performance exceeded our guidance as the clear network and value proposition continues to expand.

Business travel actually accelerated post labor day as folks return to work and hit the road. We expect the return of business travel from deeply depressed levels to complement the strong leisure trends, we've been experiencing providing added strength to our travel business.

Overall third quarter booking growth of 47% represents a 31% CAGR from 2019 pre COVID-19 levels of.

This 31% approximately 80% in same store growth.

Reflecting the strength of the clear experience and network net member retention in the quarter was 92, 2%. We are encouraged by the unit economics of cleaner, plus including low CPA high incremental margins and impressive retention across cohorts retention continues to remain above our long term expectations of the operators.

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Free cash flow for the quarter was positive $5 3 million, bringing trailing 12 month free cash flow to $92 million.

The $92 million includes a complete annual cycle for our American Express platinum contract.

This quarter's free cash flow as well as trailing 12 month free cash flow include the approximately $65 million payment to American express for the year one platinum contract.

We expect continued growth in free cash flow as our growth in bookings and our culture of efficient and effective spend you'll significant operating leverage in Q3, opex, excluding the United warrant expense grew 23% year over year, roughly one third of our revenue growth rate.

Adjusted EBITDA more than doubled sequentially and adjusted net income is positive in the third quarter and on a year to date basis.

In October United Airlines invested in exercise warrants, representing $2 1 million class a shares. These warrants were issued in 2019 and had been reflected in our SEC filings as outstanding warrants our partnership with United continues to be focused on bringing new innovation and friction free travel experiences to their customers.

Total cash and equivalents as of September 30th was $701 million and reflects approximately $5 million invested in share repurchase at an average price of 22 98 as well as cash used for debt settle Dara shoes.

Today, we announced a 25 special cash dividend as we noted in our IPO prospectus letter, we're fervent believers in the Ams growth free cash flow and economic capital allocation to maximize long term returns.

In addition to our opportunistic share repurchase program. The special cash dividend is another tool to return capital to shareholders. We will continue investing in organic growth pursue inorganic growth opportunities and opportunistically return capital to shareholders.

In this uncertain economic environment, we have good visibility into our business underpinned by a recurring revenue subscription model.

Our fourth quarter guidance expect GAAP revenues of $123 million to $125 million and total bookings of $142 million to $146 million.

With an expected Q4 soft launch of TSA pre check we expect revenues from this program to build throughout 2023.

We'll now go to Q&A.

Operator Q&A.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove a question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star for any questions.

Okay.

One moment please.

Poll for questions.

Our first question comes from Dana Hensley with Teasley Group. Please proceed with your question.

Good morning, everyone and congratulations on the very nice results nice to see business travel recovering along with US along with leisure travel the travel Palooza Karen that you had mentioned I think last quarter.

Two things on the TSA pre check launch how do you envision that rolling out how is the plan how do you see the revenues building there any update on American Express and what Youre seeing there and lastly is there seasonality that we should be mindful of but the retention rate that is excellent.

It ticked down Justin.

Slight debt from last quarters. Thank you.

Hi, Dana let me start with a little bit on seasonality in general I'll, let Ken talk to the returns then and then I'll also give some insights into the pre.

Pre Sac line.

There's a little static so hopefully you can hear me Okay. Dana can you hear me, Okay I hear you great.

Okay, Great and then.

Ill turn it over to Ken.

Historical seasonality is not showing up right now and I do think in general sort of separate from retention, but just a general observation. The historical travel trends that you saw are being turned upside down a little bit so whether it be people coming to the office Tuesday through Thursday, and then traveling Friday through Monday.

Right. That's just very different than you used to see Thanksgiving starts earlier and so I would just say you.

In general across travel historical seasonal patterns, you are not seeing historically, we saw a pretty big drop off after labor day and as kids go back to school and people are getting geared up that just didn't happen this year. So.

It will be interesting to watch as.

The following year shakes out any new trends that appear to seasonality because history is not a reflection of what's going on right now Ken do you want to comment on retention and from <unk> perspective.

There is not really seasonality in your retention and as we said I think a couple of quarters ago. We started talking about how our current levels of net retention or above our long term expectations and that we would expect.

Essentially migrate.

Migrate back to the operator.

Opening slower quite frankly than we than we would've thought the retention has been stronger than we expected, but there's not a seasonal impact to that.

It's more of a function of the debt.

Coming back to what we've been talking about.

And in terms of pretax and as we get closer to launch we'll be bringing more details, but I think it's safe to say that we've always been focused on bringing a value faith and <unk>.

<unk> centric offer to consumers and I think we started to talk about that today, whether you travel one time per year with reserve one time per week with clear plus pre check standalone pre check together, a clear plus pre check with the other tools like home to gate. There is so much we can be doing to make the travel experience safer and.

<unk> on behalf of the American travelers that we are incredibly excited to bring this product to market again, I would just focus on our culture of value based and customer centricity being obsessed with the customer experience whether that be.

Enrollment communication or pricing and certainly in a post COVID-19 environment, you can read online that it's harder to enroll so we want to be acceptable we want to live our brand.

With our ambassadors and so we're really excited to be bringing this product to market and we'll be bringing more details as we get closer to launch.

Your last question was just on the Amex update.

You saw in the quarter, we've cycled out five quarters and so we've completed the first contract here.

Reimbursed.

Sure.

Accrual and so we're on year two it's still going strong we're very pleased with the partnership.

Additive to our Tam.

Thank you.

Yeah.

Our next question comes from Paul Chung with Jpmorgan. Please proceed with your question.

Hi, Thanks for taking my question.

So just on the pipeline of airport launches no Europe .

46 today.

What can we kind of expect for count to end the year and as we think about next year, what are some kind of cheap airports you're targeting.

And then within your installed base, where are you seeing opportunities to add more lanes then.

Which airports are seeing kind of higher penetration rates and nice momentum.

So today, we did announce our airport number 46, so we're really excited to be bringing third of San Juan Puerto Rico, you will see other announcements. This week as you know we don't announce until we launch and so I think we will end this year hovering around <unk>.

And when you look at the opportunity to bring clear to you know the top 60 to 75 airports in the U S. I think I've said before that really is our focus you see the experience that American travelers are having through clear plus lanes and it's.

Paul from a predictability you see it in the N. P. S. You see how hard travel is so I think it's safe to say that we are talking to all of those airports and we've had a lot of new.

Growth this year in the network and we expect that next year as well and quite frankly, I think travelers are talking great travelers are speaking up they want it in their airports and we want to bring it to them.

Okay, great. Thanks for that and then just to follow up on the cost of direct salaries and benefits seeing some improvement as a percentage of sales.

How should we think about the pace of growth there with new airports sign ups with some kind of steady investments there and then I guess as we think about the overall opex base, where are you seeing.

As a percentage of sales come down.

In the near term and kind of longer term, how do we think about that pace and what's driving the most leverage.

Into next year. Thank you.

Sure so starting with the.

Airport.

Because there are salaries.

Is something that came from a depressed level, we talked about how we would have to bring that back to a normal level throughout this year, which we did and from here. The growth is going to be a function of those new launches is certainly when we opened new airports there'll be additional staffing and we talked about that in the disclosure today in general.

We demonstrated strong operating leverage this quarter and it really on a year to date basis I think our expense growth is about a third of our revenue growth rate. This quarter and we continue to have a strong focus on economic efficiency and margin expansion not going to give specific guidance on where margins will shake out next year, but that is a huge focus of ours.

I would also just add to that that a lot of investment has been put in place ahead of the growth rate. So the opex at an airport is one piece, but all the back end operating expense is highly levered <unk>.

Okay.

Great. Thank you.

Okay.

Our next question comes from David Unger with Wells Fargo. Please proceed with your question.

Great. Thank you hi, can we double click on the enrollments mix I'm, just trying to get a sense of whats channel.

Seeing the most success central through Q.

Our family and friends is contributing to the meaningful bookings speed and then just on new enrollments the percentage of enrollments that trending towards mobile versus in person.

Yeah, which led to some details there. Thank you.

Sure. So just in general you know our accumulative enrollments metric.

Encompasses both clear plus as well as platform enrollments.

We don't we don't break it out, but what I will say from a clear plus perspective really all of the channels are growing on a year over year basis and on a CAGR basis through 2019 versus 2019. So we're very pleased with all of the channels.

The airport channel was a particular highlight as Karen mentioned in her.

Earlier comments and Thats very strong CAGR on a same store basis and overall.

If I can just add to that if you look at our partnerships, so whether that be American Express Delta United.

Platform partnership, it's bringing the clear brand to so many more people than we used to on a standalone basis. So not only our partnership the powerful channel, but then those people are bringing on family members are participating in guest passes and things of that nature.

So the attach rates continues with strength of the partnership channel continues with strength.

You use clear to you know get into Allegiant stadium at the Raiders to buy a beer there if you use clear at EBIT, It's now and you're new to the platform. It's now brought to you in a different way higher likelihood to join so I would just say that flywheel continues to turn.

All of these channels it really is early days.

So that's actually Im speaking with any of that in your shareholder letter you mentioned that which states you're early results indicate that almost 40% of users who are already existing clear members. So I'm just curious thinking about the car rental expansion path.

And the opportunity to grow across airports say over the next 12 months how to think about that thank you.

Yeah.

I think you should think about it on a standalone basis, and then as part of the broader travel ribbon.

If you go from the time you leave your house when you're traveling to when you get on the plane. There are so many different experiences and the car piece, whether it be parking whether it be rideshare or whether it be rental car both getting there and then on the other side.

When you arrive is an important part of that travel experience that creates added friction and rental car companies are very focused on the customer experience in different ways and so we think that there's a lot that we can do from a partnership perspective in their app or in other parts of the journey.

To take friction out and to delight their customers in that experience, which is usually connected to an airport right. So we're really excited about the opportunity to expand not only.

The network there across the country, but more use cases around that and going back to the point that we made that I really want to drive home the interoperability the ability to enroll once and use in multiple places that really is about being obsessed with the customer experience. So whether it be you know.

Dropping your bag or getting through airport security or renting your car or dropping it off.

You should be able to just always be you and sometimes youre in avis preferred customer and sometimes you're a united frequent flyer and sometimes you are over 21 to buy a beer, but you shouldn't have to re enroll multiple times and so that's what our platform allows us to do it allows us.

To create this experience within the <unk> environment for their customers.

That's great. Thank you congrats on a great quarter.

Thank you.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Our next question is from Ananda Baruah with loop capital. Please proceed with your question.

Hey, good morning, guys and thanks for taking the questions I have a few if I could.

Is there any way to think about.

What you're in.

And inside the airport capacity in.

Kris.

Then year over year.

In terms of sort of capacity just in terms of how many lanes, we have or how many pieces of equipment.

Yeah, I'm thinking Kenmore, more like lane and kind of more like I guess.

Ladies would begin to get out of the predominant like opportunity.

Okay after the opportunity.

Do you think about capacity in a number of different ways you could add lanes you could add additional lanes within a particular checkpoint, we can add additional equipment and increase our capacity that way.

So I don't know.

I can't remember.

For you, but we have absolutely increased capacity.

Within the existing airports over the last year, even 24 months.

And I guess really the Genesis of the question is trying to get a sense of.

How much of the growth that you guys have been putting up.

So just coming back to the airport.

Capacity being put on.

Capacity at all contacts you know impact and pack.

Just worth getting out about the company and the company services those sorts of things.

At least and again this is sort of the mental math I'm trying to create for myself.

These drivers.

From a from a bookings perspective, we showed 47% bookings growth in my earlier comment that's actually a 31% compound annual growth rate from 2019 pre COVID-19 levels and roughly 80% is actually same store. So the 27 airports that were open in.

In Q3 of 2007 2019, right that same sort of pieces like 80% of our overall, 31% CAGR. So hopefully that gives you a sense.

That's it.

Ill let.

Most of my other questions I'll take it offline with you.

And just another quick follow up is.

In your in your Cumulus platform usage metrics that you provide.

Anecdotally any way to think about how much of those are kind of in the airport versus versus out of there for the platform or the other other aspects of the platform and that's it for me. Thanks a lot.

Thanks, Yes, we do.

Don't break that out, but we're seeing obviously very strong growth across the board in terms of utilization.

Okay, great. Thanks, a lot guys.

Thank you.

There are no further questions at this time.

Yeah.

I would now like to turn the floor back over to management.

Okay.

Thank you for joining us today.

Thank you.

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

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Yes.

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