Clear Secure Inc. Q1 2023 Earnings Call
Good morning, and welcome clears fiscal first quarter 2000, and same Street conference call, we have with US today carries China's Baxter co founder Chairman and Chief Executive Officer.
Dan Cornett, cofounder, 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.
And in the company's reports on file with the FCC, including today's shareholder letter and 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 clearance website.
With that I would like to turn the call over to Karen.
Good morning, and thank you for joining us for our first quarter 2023 earnings call.
A clear we believe identity is the key to transforming customer experiences both physically and digitally.
We also believe trust is the oxygen the digital world needs to thrive as the World has moved online anonymity is the new norm.
The opposite of anonymity is authenticated identity the acceleration of the digital World has increase the sense of urgency to get identity right.
When clear Linkedin and its parent company Microsoft came together to explore how we can join forces to enhance digital trust and safety at scale, we aligned on a shared vision to strengthen and democratize trust across the world's largest professional network through stronger connections better conversations and <unk>.
Outcomes through.
Through our recently launched partnership we are empowering linked and over 200 million U S users to verify their identity on their profile using clear for free together, we are making it safer and easier for people to find jobs connect and build community.
Verified profile provide a holistic understanding of those users professional identities. It's not just about who you are it's about all the things that make you you.
This partnership isn't about driving clear plus memberships, it's about furthering powered by clear our identity as a service platform to expand our connected identity ecosystem, it's about bringing the trusted predictable friction free experiences you've come to expect in airports to the digital world.
We remain intent on providing American travelers with the experiences they rightfully deserve.
<unk> is absolutely booming.
In March we saw our highest average daily verification numbers and in the first quarter over 10% of checkpoint traffic in our airports came through a clear lane.
Travel is hard and getting harder as we continue to stress clear is on the side of the American traveler, we hear our members when they say, they're always looking for a clearer and more airports and we hear them when they say they want the joyful journey, we provide in more places.
Clear gives our members predictability and control over their time and their experiences. This is now the expectation with 52 clear plus and 17 reserve airports, we are expanding our network across the country and around the world.
Our expanded network is of course, good for our members and it also allows us to launch new products like TSA pre check enrollment and reserve with strength across a larger footprint. We are focused on building products for all travelers, whether you travel once a year or once a week.
I would be remiss not to mention our newly revamped clear app with an awesome new home to gate feature driving predictability and friction free day of travel experience I highly recommend to everyone on the call uses it as always we remain focused on growing members bookings and free cash flow I want to thank the <unk>.
Her team for their continued great work this quarter with that I will turn the call over to Ken.
Thanks, Scott in the first quarter finished strong with revenue up 46% and bookings up 39%, we see continued momentum into the second quarter.
Clear plus bookings growth came through a variety of channels word of mouth in airports sales digital marketing and our partners.
The report channel represented over 60% of new bookings, while partner channels, which include United Delta and American Express represented less than 20% combined.
We've never been traditional marketers, who wakes up and Google's, how do I get through airport security using biometrics with 52 airports 139 lanes and are great ambassadors, our physical footprint is unique and drives efficient growth.
It's why it's such a large percentage of our bookings come from or in the report channels.
For the two and a half million passengers, who come through an airport on any given day, they can't Miss our pods, our people or our experience in action.
We will continue leveraging this physical footprint, while incorporating our partner channels. If you think about the top hundred million travelers in the U S. They belonged to many different loyalty programs. Most belonged to an airline program a car rental or hotel loyalty program and are having an American express card.
These partners are excited to bring the clear experience to their customers and aligned with our brand and our products.
Let's look at our Amex partnership for example, as we near the second anniversary. This is a three year deal with two one year renewal options. It's a true win win for clear Amex and our shared customers.
This partnership has driven steady membership growth and expanded our Tam indexing to a younger demographic.
Platinum members use clear at similar rates with similar NPS scores to our overall base.
From a margin perspective, we saw 1200 50 basis points of operating leverage in the quarter with total expense growth of 31% versus revenue growth of 46%. This excludes the noncash nonoperational items called out in the release.
We achieved this operating leverage while opening 12, new airports and expanding four market subsequent to Q1 'twenty two our largest number of new launches in a 12 month period.
As discussed in our letter newer airports tend to be margin dilutive in the near term in fact, the new launches and expansions impacted operating margins by about 350 basis points this quarter.
We expect these markets to follow historical margin improvement trends as we've seen in dozens of airports in the last 13 years operating this business.
Today, we spoke about our newest powered by clear partners Linkedin and health Gorilla.
That we see exciting traction on the platform side and its platform bookings scale. This is another driver of operating leverage as we have made significant investments in the platform over the past several years.
Free cash flow in the quarter was 51 million up 165%.
Want to reiterate last quarter's comment on equity based compensation, we absolutely view this as a real expense free.
Free cash flow after employee and founder stock comp was $36 million up 470%.
We continue to expect full year growth in free cash flow before and after stock comp.
Total cash and marketable securities as of March 31 was $779 million and reflects approximately $6 5 million invested in share repurchase at an average price of 22 94, as well as $2 4 million used to net settle our issues.
In addition, we made a $6 million a minority equity investment in landline a company well positioned to help securely scale off airport screening.
In addition to repurchases today, we announced the 20 special dividend this dividend as a result of clears advantageous corporate structure put in place when we went public.
Through the utilization of a favorable tax attributes actual taxes over minimized, enabling the return of capital to our owners.
Our bookings guidance of $158 million to $160 million implies year over year growth of approximately 30% and excludes any contribution from project. We continue to expect operating leverage and free cash flow growth on a full year basis.
As the owner operators capital allocation and Optionality are cornerstones of our strategy, whether it's share repurchase dividends organic growth or acquisitions, we are focused on driving long term value.
We will now go to Q&A.
Thank you we will now be conducting a question and answer session.
I'd 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 read.
A question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset suppressing the stark piece.
First question comes from Dana Telsey with Telsey Group. Please go ahead.
Good morning, nice to see the progress as you think about the soft launch of T. S say in mid 'twenty, 'twenty, three but you're talking second quarter or third quarter and any update on how you expect revenues to build from that and then also on the net member retention.
Anything and marketing wise that you can do to win back previously canceled members or anything Youre seeing there and then just any adjustments that you're seeing in the new airports being added upheld that performance trends. Thank you.
Hi, there good morning.
But you've got three of them got three in there. So that's good yeah.
[laughter] I will start with our well service pre check look where we're really excited to launch. This program no one wants to get it launched more than off for the traveling public.
And you know as we mentioned last time, we got our a T O which has the authority to operate in December our teams continue to work together with TSA to.
To make progress there's a process to follow we're following it and we don't include any pre check revenue in the Q2 guidance, we would expect it to be a back half.
It would build you know as we roll it out from airport to airport renewals would happen faster. So Dana don't forget that there's two parts to the business. There's the renewal part for the existing member base and then there's the new member additions and we're excited about both ones more digital.
And one would happen more in person.
Got your next question. The next question was on retention. So from a retention perspective retention is definitely stronger than we anticipated. It continues to be and part of that is the win back strategy. So we have a lot of organic went back so people just show up at the airport who maybe.
Their credit card.
<unk> charged properly so when they come through the lean they would just swipe your credit card and went back that's about two thirds of our win back activity. So that continues strong and we have ongoing programs to win back people. That's a regular part of our business and overall I would say that continues with strength in retention in general is higher than we were expecting.
It to wind up long term and the opportunities.
And as far as new airports, you know, we talked a bunch about new airports in our letter the new airports are you know very fast breakeven cash breakeven usually within a year and.
Costs from our direct cost perspective are definitely higher in the beginning their margins they tend to be margin dilutive and then over time as we increase penetration in those airports.
The margins expand we have very high incremental margins and so what I would say as we opened more airports in the last 12 months than we ever have it's a record and so there's some margin impact from that but as we've seen operating business. Since 2010, we see a regular path of margin expansion as well.
Scale penetration and we mentioned in the letter, we have 2% MSA or CSA penetration from a population perspective, and the 47 airports and in our top five <unk>, 5%. So we think there's a long runway for growth and Dana just to add to that when you talk about the power of the network. The fact, when we open a new airport hundreds of people.
I'll show up on day, one to verify right. So those are people, who already have clear and wouldn't have been able to use it in that airport, but that extra utilization is so powerful from a retention gross add all of those good things and so you are seeing new airports ramp much faster than they did years ago because right its number.
52 to the network not number 20.
Terrific. Thank you.
Right.
Our next question comes from Josh Reilly with Needham and company. Please go ahead.
Hey, guys. Thanks for taking my questions. Congrats on the strong results in the bookings guidance here for Q2, I guess the question I'm getting a lot is.
And you highlight this in the shareholder letter, but the the.
The penetration for airports you operate still remains very low however, offsetting that is the impact of the slowing growth in TSA boarded passengers over the next couple of quarters. How do you maintain this kind of strong growth trajectory even F D.
TSA passenger growth continues to slow near term just simply due to the tough year over year comps.
So.
Thanks for the question. So we think travel will continue to grow we have capacity growth in the back half that we've seen from airlines, but our growth has diversified it comes from a number of different channels right. So we are in airport growth, which we said in the letter 60% of our growth we have partner channels and so we you know we think.
That you know our ability to grow with us not necessarily impacted on any given quarter by the by the the delta in the TSA.
Volume growth. So we think we have a lot of opportunity look I would add to that if you specifically look on a city like New York, New York had a record first corridor. This is port authority data record first quarter AR in travel 33 million that was up a million from pre pandemic 2019. So you see airlines that have said capacity is still expected.
To be up 10% to 15% in the second half of the year in March we saw our highest average daily Verifications and so when you talk about that 2% penetration on average right and and most of our airports. There's a ways to go as clearer still pretty new to a lot of these travelers right. We've oh, there's a I think we wrote we talked.
A third of our airports are less than three years old. This is still a pretty new concept over all and so when you talk about the sort of vintage if you will of our airports the power of word of mouth. The ambassadors on the ground are partners, which Ken talked about United Delta In America.
Can express.
You know being also growth engines, and introducing clear to a expanded Tam I can't Ken can talk a little bit to American Express if you want in sort of the expanded demographics, there and so there are many ways for clear to grow not to mention our new product bundles and things of that nature. So we continue to believe that these are early days, but I.
I'll also say just are incredibly bullish on travel and it's hard and getting harder and so the fact that there is growth. The fact that people are looking for the experience that they have outside the airport in the airport. The fact that we have low penetration a stronger network and offering and great partners are early days.
Got it and then just a follow up on the pre check offering.
Is there anything going on in the testing phase with the TSA that gives you more confidence around that time frame for the second half launch than maybe a quarter or two ago.
Yeah. So after receiving the two in December there is a process and we continue along with that process and we are making progress.
Got it and I'll just sneak in one last final question for me on the Amex Green card.
This is the first full quarter I believe with that in the market.
What type of adoption trends did you have you seen from that card thus far thanks guys.
So I won't speak to any one particular portfolio within the IMAX family, but we are getting a lot of questions on <unk>. So why don't I, just give a little bit of insight into the partnership overall.
And what I'll say this continues to be a great partnership the value of clear to these members.
As evident we see usage trends and NPS scores.
For the platinum members.
And you know.
In line with the rest of our base so from a value perspective, we're delivering value to those members.
It's a great way to introduce cleared a new population and its expanded our Tam we talked about.
Over a third of our markets are still less than three years old and the penetration is low as Karen just mentioned. So this is a really great way to introduce clear to a newer and younger demographic credit has expanded our Tam we skew younger with platinum it indexes to the under 45 year old demographic and you know from an N P V and the lifetime value.
<unk>. This is really exciting there's low CAC, obviously theres high renewal rates.
And given the scale of this partnership you know the average revenue per member is well below our overall retail price point, so right the incremental member growth.
Is contributing less to our bookings and revenue, but more to the expansion of our Tam into our membership base in general.
And you know as we mentioned in the letter 60% of your bookings are coming from in the airport channel and less than 20% overall of the new bookings are coming from the partner channels, including Delta, United and Amex combined but it continues to be a great partnership for us.
Our next question comes from Michael <unk> with Wells Fargo. Please go ahead.
Okay. Thanks, very much it's David Unger filling in for Michael parent I had a bunch of IMAX, but we don't have to keep calling out Alex.
So you took your bookings guide is pretty strong actually at the high end that suggesting 30% growth.
Can you guys talk about some of the moving pieces at the standing that pretty strong growth rate and more wrapped in the cycle.
It's above where most of US religion, originally modeling so any seasonality be mindful to be mindful of there. Thank you.
So I would just say in general you know our business.
Is a fairly consistent to understand right, we have renewals of prior year revenues or bookings we have.
Multiple channels as I've been saying in this call multiple channels that are contributing to our growth. We have in airport. They are ambassadors, we have a physical presence when we have two and a half million people coming through the airports on a given day and they can't they can't Miss US right. There. There is a physical presence we have ambassadors engaging with them.
So there's multiple channels to drive that growth plus the retention and plus we've taken a little bit of pricing.
If I can just jump in and maybe we've done a bad job of explaining that this is a great business and members are passionate about clear and so the more airports that we open that more people join theirs family attach rates and travel is hard and getting harder and I do think that the experience that you see out.
Side of the airports, whether it be ordering food online compared to what that experience was 10 years ago or you know flagging down of Nuber. This is the new consumer expectation and people are looking for that in travel they're looking for the home to gate App to know when to leave their house and get to the airport or to get to their gate with 40 minutes because we've.
Mapped that all out there looking for predictability and friction free experiences and our brand has now become synonymous with that and I do think that these you know when we talk about early days, there's a bunch of new airports. When you look at the growth had you know coming out of 2019 are heading in and then sort of screeching to a halt with COVID-19.
We've expanded our airports, we've added 19, now and a little less than two years. So I think it's just a confluence of a convergence of events of customer expectations the growth of the network.
And new products that we're offering and and then the you know the power of the network to retention to gross adds and to partners and you are seeing our brands show up in more places whether it be our partnership with Linkedin or when you use it at a sports stadium or at a hospital and so this concept of friction free experience isn't a brand that stands for.
And what we did with health passing Covid I think it's a testament to the vision into the team making it happen.
But that's all that's all awesome.
I appreciate the special dividend you guys still have a lot of cash on the balance sheet.
I would love to hear and free cash flow still Bubbling very nice.
Just bigger picture, but love to hear about capital management philosophy, if you could share with us. Thank you.
Sure I think philosophically, we believe in being opportunistic.
So we want to maintain maximum flexibility, we're opportunistic and we're owner operators. So we're aligned with shareholders in general.
Thanks, guys.
Our next question comes from Paul Chung with Jpmorgan. Please go ahead.
Hi, Thanks for taking my question so.
Just on the Linkedin partnership.
Talk about how that deal came about how to kind of think about.
You know monetization.
In respect to that 200 million sub base.
What other.
Social media platforms or.
Or other use cases, we should be thinking about.
Essentially how should we kind of think about platform.
Contribution through the year and kind of longer term.
And a follow up.
Perfect, where we're really excited about the Linkedin partnership because big picture Trust online matters and the acceleration of the digital World has created an absolute sense of urgency to get identity right. So many things that you're hearing about today in the news if you sort of strip them back you realized identity.
Identity identity is foundational so linkedin and clear and Microsoft definitely came together with a shared vision that trust online matters Trust and safety for their hundreds of millions of users are core to their brand and to their future and so it was that alignment.
You know at some level, we always say our best form of of B D are happy clear members I think when people go through the experience they start to realize the other places that you could use clear and and so having a verified badge on your Linkedin profile means users are more likely to be considered for a job to have their email opened or to build connection.
And so when you look at what the future is it's to have hundreds of millions of Linkedin members with verified badges on their profile and then to have reasons right or benefits for those badges. So again in mail P parts of job searches someone more.
To open your request for a connection and those things create a powerful networks in the new age of I would say anonymity online and this is authenticated identity online the absolute opposite so I do think that this serves as a model for other online.
Marketplaces and networks and one that clear can play an important role and also as I talked about earlier. This morning. This is not about selling a clear plus membership. This is about our identity as a service platform business and so you will see that scale on both members and revenue.
News.
Over this year and in the future. It's a core focus for us the vision that we had 13 years ago was absolutely right and I think the world has now recognized the need for trust online is crucial and clear as a really important partner in that equation.
Very cool stuff and then secondly can you talk about.
The strength of our free cash flow in the quarter anything to call out there. So.
Earnings continue to improve booking.
Bookings growth.
Being accrued nicely you know as we move through the year and thinking about seasonality.
Can we expect this kind of quarterly run rate of free cash flow.
No that kind of builds Institute Q.
Came out in three Tijuana crude and then kind of rebound in paid some four key was that the right way just kind of thinking about it and then given the strong starts in a year.
Do you think we're on track to exceed 22 levels. Thank you.
Yeah, so from a free cash flow perspective, but generally speaking, we're an asset light business and we are opening in airports, but you know there there are cash they're generally cash breakeven in under a year from a free cash flow perspective, we have said that we expect to grow free cash flow on a full year basis year over year in 2023 and that stems from.
Bookings growth and operating leverage, which we also said we're going to generate operating leverage in 2023, and a full year basis as far as cadence you are correct that there would be a cash outflow in Q3 as it was last year, but again on a full year basis, given the way our business works, we have bookings, which generally exceed GAAP. When we're when we're a GAAP revenue when we're.
Growing and that's the nature of a subscription based business.
And it flows to the bottom line and from a free cash flow perspective.
As we collect cash upfront so you.
To reiterate yes grow free cash flow on a full year basis versus 2022, both before and after stock comp.
And demonstrate operating leverage on a full year basis.
And the cash outflow in Q3, that's correct.
Yeah.
Great and then just to follow up on the leverage how do we think about kind of modeling seasonality investments and kind of overall trends through the year between what kind of Opex line items pace into Q, and where we can see more leverage in the model. Thank you.
Sure.
Without getting into specific quarterly guidance and generally speaking I would say G&A is the area, where you'd see the most operating leverage.
R&D is still going to be an area of investment for us, although we should should demonstrate operating numbers there as well.
You know a cost of revenue share fee, we expect that to be fairly stable over time, there is some quarterly volatility.
We saw in Q1 and finally on the.
The field you know the labor line, you know that should now grow in line with that opening new airports number one obviously.
Obviously, when we opened new airports, we're hiring new people individually at that local level.
And there should be some growth along with volume and opportunities to to enroll new members, but generally we expect to see scale operating leverage across the board, mostly you know the most in G&A.
And then less so in the cost of revenue, which is more of a variable.
Great. Thank you.
Our next question comes from Ananda Baruah with loop capital. Please go ahead.
Yeah. Good morning, guys. Thanks for taking the questions here.
Yeah, two or three if I could can you you mentioned it but I think in response to one of the questions that you have capacity growth in the back half of the year or something along those lines.
And I was wondering what that kind.
Kind of refers to set some context, there would be great. Thanks.
Capacity growth I don't I don't actually know referring to from a crude was one of the quote it was one of the questions around air travel.
Yeah, we can take it offline.
Just a clarification from a macro but yeah, yeah, we've seen in the airline market.
Seen the airlines talk about capacity growth in the back half I see okay. Great Super helpful. And then I guess, just sticking sticking kind of with that theme you guys have like.
Returning to business travel view.
In terms of pacing and impact and whether it's for you guys or for the industry I would just love to get any context. There that you guys might have as a as an opinion at least.
My opinion as being on the road for a few conferences both at the HIMSS Conference for Health care in Chicago in the Milking conference last week in the L. A it is there's overflow rooms that are holding overflow rooms, it's insane.
So we continue to have a very bullish outlook on travel are on both the leisure side and the business side, we sent surveys out to members, which is really the way that we know it and I think we.
We continue to see a return to business travel staying strong.
Okay, that's super helpful.
Maybe just trying to drill down a little bit is it do you have any sense or any opinion on like what inning, whatever normalized travel might look like business travel might look like ultimately do you have any any opinion on what inning, we might be to the return of that normalized currently yeah, I do not because we.
It gets more on holistic right number of people getting on planes and coming through airports on the travel side of our business and I wouldn't I would say that Holistically again, and that's why I was talking about the airline at 10% to 15% I think both planes are oversold. These days and so we continue to be very positive.
On the industry as a whole and volume, but I don't have a good feel for you for a breakdown of business.
No. That's all Super helpful context, I appreciate it and I guess last one for me is.
<unk>.
Any I guess, another one like what would be well, what's a good way for us to think about.
Lane additional lane expansion opportunity inside of existing existing airports that you guys have and that's it for me. Thanks.
Yeah. So that's a great question and we're actually very focused on expanding our capacity to recent examples.
In Dulles, where we've seen a lot of growth membership, we actually expanded to an additional pre check.
Due to an additional pre tax lien recently and I think it was last week or the week before and this summer we'll be launching in the international terminal in Atlanta.
Probably our most constrained market and so that will increase capacity for our members are fairly dramatically.
And I think last quarter, we added a terminal in new works that we continue to focus our you know from an obsession with the customer experience perspective.
On technology on lanes on innovation and so you'll continue to see both new airport expansion Lane expansion within our current airports and innovation that drive throughput and then you saw an investment in landline said, we think that there are so many opportunities to continue to transform that.
Customer experience because it's not just today that we're excited by travel we think by 2030, there's gonna be another million people coming through airports on top of the two and a half million. There that are there today. So when we think about lean in the airport of the future. There's a lot of innovation going on.
Great context, thanks, so much guys.
There are no further questions at this time I would like to turn the floor back over to Karen Shannon Becker for closing comments.
Thank you for joining our first quarter 2023 earnings call I think as you heard us say identity is foundational and travel and beyond we're excited with the strong progress of the <unk> B to C and b to B dual growth engine and as always I want to thank the clear team for all of their great work this quarter. Thank you.
This concludes today's Johnson taste.
Connect your lines at this time, thank you for your participation.
Yeah.
Uh huh.
[music].
Hum.
[music].
Yeah.
Okay.
Okay.
Yeah.
Hum.
[music].
Okay.
Hum.
[music].
Yeah.
[music].
Okay.
Yeah.
[music].
Yes.
Yeah.
[music].